Chapter I. Firm foundations and castles in the air
The chapter focuses on the two investment theories, the castle in the air and the firm foundation. According to the firm foundation theory, investing involves knowing the real value of the investment and make decisions based on the real value. One of the examples to explain the concept is investing in Coca-Cola Corporation wherein investing in the company’s stocks requires determining the actual value of the company. In terms of the castle in the air theory, the concept implies that investments should be a response to what others are doing, and the returns for such investment can be achieved by riding in the waves of people following the same trend. There are reasons that people make an investment under the castle in the air theory, which is following a trend, or investing based on firm foundation. However, theory also suggests that making an investment decision based on either approach can be true, but works only in different times.
Chapter II. The madness of crowds
The chapter can be described as entertaining considering its interpretation of financial crazes in history including the craze referred to as Tulipomania. The other historical narratives explained in the chapter also include the South Sea Bubble and the Wall Street Crash of 1929. Using the historical narratives about financial craze, the chapter explains how the market grows and everything becomes overvalued until such time that all suddenly returns to normal. The graphs of prices in the chapter about the three examples provides a visual representation of how stock prices starts to climb up in annual increments until it suddenly falls to the same value as they were before the big climb.
Chapter IV. The explosive bubbles of the early 2000s
The year 1999 to 2000 is considered the start of the Internet era where a sudden influx of dot-com businesses. The chapter explains the perceived Internet bubble was a result of the IPO mania that had a huge impact in the 1960s, the pursuit of future efficiencies in 1850s on railroad stocks, and the smoke and mirror effect of the South Sea Bubble. However, all of them made a climb eventually crashed where everything starts from where they were before. The author wants to explain that everything that happened from before until now is not a coincidence, but rather a result of occurring efficiencies, but time and time again, when inefficiencies suddenly emerge, it does not take much time before the stock market takes it out.
Chapter XIV. A life-cycle guide to investing
After several explanations about the theories in investing, the book turns its focus on the crucial part, which is providing a guide in investing. Furthermore, the chapter provides relevant information about how everyone can make an investment decision on their own. This means that if a person decides to make a long-term investment for a span of more than 10 years, there should be a heavy investment activity to set the future gains straight for the long run. However, if the investment goal is aimed for the short-term, it is more practical to take on a more diversified approach focusing on low-risk investments such as cash or bond particularly when the big bubble is about to burst at any moment.
References
Malkiel, Burton G and Burton G Malkiel. The New Random Walk Down Wall Street. New York: Norton, 1999. Print.
