“Samuelson spotted a mistake in Bacheliers work. Bachelier's model had failed to consider that stock prices cannot fall below zero.”

Part Three, Arbitrage, The Random Walk Cosa Nostra, p. 122
Fortune's Formula (2005)

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William Poundstone33

American writer 1955

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“To the man who held stock on margin, disaster had only one face and that was falling prices. But now prices were to be allowed to fall. The speculator's only comfort, henceforth, was that his ruin would be accomplished in an orderly and becoming manner.”

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“Last quarter, it was just announced our gross domestic product — a sign of strength, right? But not for us. It was below zero. Whoever heard of this? It's never below zero.”

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“In one respect, however, I agree that monetarism was wrong, namely, to the extent that it failed to recognize the need to allow inflation to occur to the extent that it was solely due to falling output or productivity—a case I have argued, along with the symmetrical one for letting prices fall as productivity improves, in my IEA pamphlet Less Than Zero.”

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“Once stock prices reach the point at which it is hard to value them by logical methodology, stocks will be bought as they were in the late 1920s not for investment but to be unloaded at a still higher price. The ensuing break could be disastrous because panic psychology cannot be summarily altered or reversed by easing money policies.”

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“When credit is expanding, the rising price level and high profits bring about a high rate of interest. When the expansion has reached, the limit permitted by the stock of gold, the rate of interest is put still higher in order to bring about a fall in the price level. When the fall in prices takes effect, a low rate of interest becomes appropriate, and when credit contraction has proceeded so far that a redundant supply of gold has accumulated, the rate of interest is depressed still lower in order to bring about a renewed rise in the price level. Thus a high rate of interest corresponds first with rising, then with falling, prices, and so synchronizes with high prices. A low rate of interest corresponds first with falling, and then with rising, prices, and so synchronizes with low prices.”

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“But now for the final exam: If you expect to be a net saver during the next five years, should you hope for a higher or lower stock market during that period? Many investors get this one wrong. Even though they are going to be net buyers of stocks for many years to come, they are elated when stock prices rise and depressed when they fall. In effect, they rejoice because prices have risen for the "hamburgers" they will soon be buying. This reaction makes no sense. Only those who will be sellers of equities in the near future should be happy at seeing stocks rise. Prospective purchasers should much prefer sinking prices.”

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“The price of a stock is strongly influenced by the behavior of the traders in a nontrivial way.”

Didier Sornette (1957) French scientist

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“Never invest in a company with the target price for the stock in the name of the company.”

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Context: I've been doing this for years. Never invest in a company with the target price for the stock in the name of the company.

“Samuelson spotted a mistake in Bacheliers work. Bachelier's model had failed to consider that stock prices cannot fall below zero.”

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William Poundstone33

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