Let’s set the stage. The year is 1984. Recently, there has arisen a growing consensus that the stock market was fully efficient, called “Efficient Market Theory.” Basically, academics and investors were declaring it impossible for someone to consistently pick stocks that would beat the overall market average because everything was priced in already. Columbia Business School hosted an epic debate as a contest between Michael Jensen, a professor from the University of Rochester and one of the leading voices of the Efficient Market Theory versus Warren Buffett, a famed stock-picker. Jensen went first. He argued that if you flipped a coin 50 times, there would be someone who happened to get heads 50 times in a row, but that didn’t mean that that person had skill.
He called them “The Superinvestors of Graham-andDoddsville.” Buffett has unequivocally declared the winner after his masterful speech. No one could doubt the numbers or the logic.
Why Do Stock Prices Fluctuate Much?
Open any financial newspaper like the Wall Street Journal. Turn to the stock quote section, pick any company at random, and look at the high and low stock prices from the past year. Let me tell you a story. It’s a story that legendary investor Benjamin Graham told. It is about a business partner of yours, named Mr. Market. Imagine you own a business together. Now, Mr. Market is a good guy, but he suffers from wild mood swings. One day he wakes up, and the sky is blue and he is feeling really, really good. So he offers to buy out your stake in the business for way more than it is worth. Then the next day, he wakes up and it’s raining, he’s feeling desperate, and he is screaming that the world is going to end. He offers to sell you all of his stock in the company for half of what you paid for it. You take it! The next day, Mr. Market offers to pay a price that is neither extraordinarily high nor extraordinarily low, so you just do nothing.
Why Do Companies Prepare Financial Statements?
All companies need to keep track of their finances. This means the company is keeping track of all of the money coming in and money going out, as well as other transactions that don’t necessarily involve the exchange of money. At the end of each month, quarter (three months), and year, a company will prepare financial statements, which are a summary of all the financial transactions for that period.
good tips, i’ll