Two Theories of Stock Investing Strategies

Introduction ....................................... 1

The Castles in the Air Theory ................. 1

The Firm Foundations Theory ................... 2

Assessing the Tulip-Bulb Craze ..................... 3

Assessing the Internet IPO Bubble .................. 5

Importance of the Castles in the Air Theory ........ 7

Conclusion ......................................... 8

References ......................................... 9

This research examines two theories related to stock investing strategies. The theories are (a) Castles in the Air and (b) Firm Foundations. The basics of the theories, including their effects on market prices, are explained in this Introduction. Following the explanations of the theories, the stock market phenomenon referred to as a "craze" is examined by assessing the Tulip-Bulb Craze and the Internet IPO Bubble in relation to the two theories. Finally, the importance of the Castles in the Air Theory is discussed.

The Castles in the Air Theory in relation to investing in equity stocks focuses on the psychologically-based and emotionally-based decisions made by some general investors, as well as decisions made by some professional investors based on interpretations of the likely emotionally-based decisions that will be made by general investors. Such investment decisions do not consider the fundamental characteristics of an investmen

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nd industries, while overall stock market prices tend to change in response to developments in the overall economy. Assessing the Tulip-Bulb Craze The Tulip Bulb Craze occurred in the Netherlands from 1634 through 1637. Tulips were introduced to the Netherlands from the Middle East in 1593. The flowers and plants gained in popularity, and, as a consequence, prices rose steadily. Because of the rising demand for tulips, a market developed for tulip bulbs. Bulb trading became speculative in nature, wherein few people participating in the market had any intention of every actually growing tulips and selling the resulting flowers (Galbraith, 1993). The people who were growers were forced to acquire and set aside bulb stocks for future production to protect themselves from future price rises. The actions of the tulip growers placed further pressures on bulb supply, which in turn drive prices higher. Mass hysteria gripped investors, some of whom were willing to risk valuable assets (real property, cash savings, and so forth) to invest in the perceived promise of tulip bulbs (Galbraith, 1993). Although the Dutch tulip growers had the bulbs they needed, the speculative investor persuaded themselves that foreign investor would bu

Category: Economics - T