December 17, 2008

Two Stock Investing Theories

Filed under: Finance — Robert John Ed @ 3:58 am

I’m beginning a new book on personal finance recommended to me by my finance instructor.  He’s pretty darn good at that stuff, so I asked him for advice on where to get started on personal finance.  I’m only a few chapters in, but it’s well written (not stuffy like you might imagine financial writing to be) and  I figured that I’ll write some things down about it.

The book is mostly oriented around stocks.  The first thing it gets to describing are the two basic stock investment theories.

The first theory is called “firm foundations” and is pretty basic.  The idea is that in order to make money on stock investments, one should analyze the current market conditions and surrounding situations pertaining to a stock to derive a value.  That value is then judged against it’s actual market price.  The investor should then sell stocks that have risen above their actual value and buy stocks that have dipped below their actual value, wait for their impending rise and sell.  “Buy low, sell high.”  Pretty basic model, but the way it was explained made it a little more intriguing.

The second theory is called “castle in the sky.”  This one is a bit more interesting as it views that firm foundation actions are too difficult and too much work to actually work well.  Instead, it relies on a knowledge of what the market will do.  The investor of such a theory would spend time studying current conditions in the market and attempt to predict how it would buy before it actually bought. By effectively predicting and preempting the buys of certain stocks, these investors seek to own the stock expected to rise and gain from the large price hike that a demand will cause.

Here is a page with both theories, and a few others.  Personal finance has never really excited me and I’m not sure why.  This book is pretty good though, it’s getting me thinking about investments of all kinds and how I can be proactive in the process.  Being that personal finance is so important, that’s probably a good thing.  I’ll keep updating on this book as I learn more.


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