MBA 821 - Reflections on Module 3 - Behavior of Stock Market??

Your responses should demonstrate reflective thought:

These reflections are about the equity markets being efficient or not and the three types of efficiency, Weak-form, Semi-Strong form, or Strong-form. This of course, based on comments from Robert Prechter, assumes that these equity markets follow the same logic and rational as economics or the theory of supply and demand. Prechter argues that movements in the equity markets are socionomic and not economic in nature and do not follow the supply and demand theory. If the market followed the supply and demand markets, then investors would sell stock at the top of the market instead of investing more money and buy at the bottom instead selling the stock. Investors follow the socionomic aspect of following the herd or crowd type psychology. Additionally, the supply of a stock is higher at low prices when compared to higher prices which is opposite of the supply and demand curves.

What form do you think is represented on the NYSE?

I would say if one had to chose one it would be weak-form efficiency. This is due to the fact that there is still insider information (i.e. managers knowing more than the market) and other information financial institutions know about the company that causes a stock to rise or fall. This is also due to the creativity that resides in the valuation of a stock. Certain measurements are deemed more valuable at certain time frames and less valuable in others. But assuming more transparency in financial statements, fundamental analysis of a company is a way to sift through and find value stocks or growth stocks that are still growing at acceptable rates. The investor must also be aware of the future economic condition predictions and the socionomic aspects of these predictions. The last thing is which industry the company resides in and if it is stable economic industry, a lagging or leading economic industry.

Do you think stock exchanges in emerging markets have a different level of efficiency?

NO not really. There is enough to argue that all of the market movements have nothing to do with efficiency and everything to do with how society views and assesses risk in the market. The mood of society dictates equity market movements. Emerging markets have a higher degree of risk associated with them due to more insider information and corruption within foreign countries and companies. Less regulation and different accounting regulation cause investors to assign risk.

Does this impact your view in regard to investing in common stocks? Explain.

A little. Shows that the long-term view is the best and has been touted by wealthy investors is right on the mark. Do not get caught up in the herd or crowd movements of speculation of equity markets. Fundamental analysis and holding a stock for a long-term is the best way to invest. If the investor truly believes in the stock and it is undervalued, then they should buy the stock on the downturns to strengthen their position and lower their cost per share and set a long-term price of the stock in which to sell. The socionomic aspect of the market is just riding the waves and chasing after the latest fade or trend.