Random Walk

The Random Walk theory holds that markets are so efficient that information is known to everyone. Due to these efficiencies, the value of a stock, commodity, etc., is priced accurately at all times. Prices fluctuate based on new information that is distributed to the public. Because of efficient information, the future value of a stock cannot be predicted; however, the theory does believe that the stock market rises over time. The Random Walk theory holds that the best way to make money in the market is to hedge your risk by dividing your money into twenty equal parts, buy twenty random stocks, and let your money ride for as long as possible.

Some of the best ways to select stocks according to this theory is to throw darts at a stock page or let your dog walk on a stock page, picking a stock with every step. While the stock selection may seem laughable at first, a competition that takes place yearly in San Francisco should be noted. Some stock market analysts are asked to select a group of stocks that they believe will outperform the market in the year ahead. One of the experts is a chimp from a local entertainment park. While the chimp has never won the competition, it consistently places among the top five experts.

This may discourage some individuals from venturing into the financial markets, but for us it encourages us to believe in ourselves for picking stocks, not so-called financial experts. There are many individuals who outperform the market on a yearly basis. Also, we don’t believe that the markets are as efficient as some people believe. Information is not necessarily known to everyone at the same time.