Stock Investing Strategies

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 investment security or of the company behind that security. Rather, investment decisions explained by the Castles in the Air Theory are based on (a) what investors hope will happen or (b) what investors persuade themselves will likely happen (Malkiel, 1999).

The Castles in the Air Theory can affect market prices in multiple ways. Companies that participate in the creation of a new industry that also are characterized by a sound management that have a good understanding of the potential of the new industry will be

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nd 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 buy their tulip bulbs. The foreign market did not materialize, and when a few of the speculative bulb owners decided to engage in profit-taking, the downhill rush in tulip bulb prices ensued and gained momentum. Most speculative buyers of tulip bulbs had contracts to sell their bulbs; however, once the crash began, traders defaulted on promised to buy (Galbraith, 1993). Accurate data are not available relativ

Category: Economics - S