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Kristen Cassady


May 3, 2009

Investment Theories

The American humorist Will Rogers once said, “I’m more concerned about the return of my money than with the return on my money.” It’s a natural instinct by human beings that we all want to enhance our wealth. In order to avoid undesirable risk with our future savings, there have been many techniques introduced to help investors get the greatest return on their investment. There is always some element of risk in most of investments, but with a careful and informed approach such risks may be contained to a large extent. Over a period of time, the desire of management of finance has resulted into many types of personal investing, and these styles have created a number of theories of investments. These investment theories try to explain and support particular type of investment strategies. A few of these investment theories include: Elliot-Wave Theory, Efficient Market Hypothesis, and Behavioral Finance.


The Elliot Wave Theory was developed by Ralph Nelson Elliot in the late 1920’s. Elliot examined yearly, monthly, weekly, daily, hourly and half-hourly charts of the various indexes covering seventy-five years of stock market behavior. By November 1934, Elliot’s confidence in his ideas of the Wave Theory had developed to the point that he presented them to Charles Collins of Investment Counsel, Inc. in Detroit. He discovered that stock markets actually traded in a repetitive cycle, instead of what most believed to be a somewhat chaotic manner. Elliot discovered that these market cycles resulted from investors’ reactions to outside influences or the main psychology of the masses at the time. He found that the upward and downward swings of the mass psychology always showed up in the same repetitive patterns, which were then divided further into patterns he called “waves”.


Elliot’s theory says that stock prices...