Capital Ideas — Chapter 8: The Best at the Price

1. 1. The efficient market hypothesis suggests stocks are priced at fair value, making buy-and-hold superior to active trading.
2. 2. John Burr Williams published the Dividend Discount Model in 1938, which values a stock as the present value of all future dividends.
3. 3. David Durand's 1957 article linked growth stock valuation to the St. Petersburg paradox, showing infinite expected value does not justify infinite price.
4. 4. Benjamin Graham's security analysis focuses on balance-sheet data and buying stocks at a discount to intrinsic value, using rules rather than a formal model.
5. 5. By 1958, stocks traded at 18 times earnings, and dividend yields fell below bond yields, ending a century-old relationship where stocks were cheaper than bonds.
6. 6. Graham and Dodd anticipated market efficiency, arguing that many analysts make prices relatively right, diminishing opportunities for above-average returns.
7. 7. Both the Dividend Discount Model and Graham's approach recommend buying unloved, depressed stocks and selling popular ones, requiring patience and fortitude.