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The Random Walk Theory
The Random Walk Theory posits that stock prices move in a random and unpredictable way, making it impossible to use past data to accurately forecast future movements. This concept supports the notion of market efficiency, where all available information is already reflected in stock prices, leaving no room for traders to consistently gain an edge.
Key Takeaways:
1. Unpredictable Price Movements: The theory asserts that stock prices are random, so past trends can't reliably predict future prices.
2. Market Efficiency: It suggests that consistently beating the market is impossible without taking on extra risk, as all known information is already baked into prices.
3. Investment Strategy: Burton Malkiel, in his book A Random Walk Down Wall Street, advocates for a long-term, buy-and-hold strategy with a diversified portfolio, such as an index fund, rather than attempting to time the market.
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