Random Walk

So upon some research on what are some good books to borrow (good meaning time-tested, theories that hold true for decades), I borrowed "A Random Walk Down Wall Street" by Burton G. Malkiel.

I am currently about halfway through the book, and it's apparent that the author is not a fan of technical analysis. There are 2 school of thoughts in the investing world; the first is the firm-foundation theory, which espouses looking at the fundamentals of the firm (growth potential, dividend payouts, risk level, market interest rates). Basically this is what most people would know as fundamental analysis. The second is called castle-in-the-air theory. It means that people may not care about the fundamentals; as long as there are people who believe in buying the stock for a higher price, it would be rational to buy it at the current price, regardless of whether or not the firm is over or undervalued based on the current price. In order to know if the price will rise or fall, they look at past trends and attempt to predict future prices.

According to the author, a buy-and-hold strategy of the indices will tend to do better than technical analysis, after accounting for the transaction costs. My personal feel seems to agree with him, although I have to read more on the other side of the story to make a more informed decision.

And also, eventually there will not be any greater fools to buy the overvalued stock, and that's how crashes happen. So don't be tempted to follow the castle-in-the-air theory, because we will tend to always believe prices will still go up and not knowing when to quit, until it's too late.