ROI and Securities Malkiel, B.

ROI and Securities

Malkiel, B. (2005). "Searching for Rational Investors: Explaining the Lowenstein Paradox." Journal of Corporation Law. 30 (3): 567+.

Lowenstein, L. And S. Klarman. (2005). "Searching for Rational Investors in a Perfect Storm." Journal of Corporation Law. 30 (3): 539+.

Securities are tangible financial instruments that represent a dollar value. They may be debt securities (bonds or banknotes) or equity securities (common stocks, futures, or options. Commercial enterprises often use securities as a means of raising new capital and are often an attractive option to bank loans depending on a variety of economic factors. Traditional financing, for instance, often requires assets to back up loaned money; return on investment for a security is based upon the capital provided by the initial issuance. Because the traditional economic function of a security is investment with the eventual expectation of income and capital gain, the choice of security (e.g. Government bond, money-market instruments, debt securities, etc.) has not only a variable risk factor, but a similar variation on ROI. Additionally, differing scenarios can, and will, cause the expected difference between fixed and risky ROI in the art of arbitrage deals and other trading strategies.

The articles under review take certain market conditions and define them as scenarios, then chart the ways in which ROI was codependent upon a number of other factors: economic trends, industry trends, balance sheet ratios, historical performance, and the like. The Lowenstein Paradox fits into our analysis and needs to explain actions with securities. It argues that certain types of securities; high-tech for instance, at the beginning of the 21st century demolished efficient market performances through their particular involatility and uniqueness. Further, Lowenstein believes that the value investors earned more because they evaluated the type of stock and stayed away from the high-tech bubble (boom-bust) scenario. In fact, Lowenstein's notion of efficiency is that market prices are always perfect reflections of true values because rational investors already erase most egregious discrepancies between price and value with their own strategies. Thus, the paradox is the issue and belief that if markets are efficient, then the most rational strategy is always to buy and hold low-cost broad-based securities; but if the market is indeed inefficient, then it is not sensible to invest in broad securities. The very nature of the market paradigm is, then whether the cup is half empty or half full, and one cannot find 100% agreement or proof for either position; but instead a series of examples that tend to buttress the argument depending on the nature and type of the security itself. Then, when one changes the dynamic of the hypothesis by adding a differing mix of securities, the paradigm becomes far more complex.