**Market Models**

**Value and Economic Fundamentalism**

Possibly the earliest analytical approach to stock valuation is the work of Graham and Dodd, which seeks to find value from the discounted return on dividends. This fundamentalist approach can include other variables as well, such as the U.S. government economic reports, other government reports, etc.. As time passed it became understood that emotions played a role in investment decisions and should, in some way, be included. Also, discounting the dividends required a forecast of interest rates. In the modern world, that turns out to be difficult indeed (10, p18). More generally economic fundamentalists study market/economic variables and try to fit the pieces together, in an implicitly linear way; to find value. We would call this "true value" since it is what the asset is "really worth", something akin to the Graham & Dodd discounted dividends value. With true value in hand, successful fund growth would be assured by seeking out undervalued assets. Again, success is elusive.

**Mathematical Fundamentalism**

A mathematical fundamentalist goes a step past economic fundamentalism in that an attempt is made to not only identify the variables, but to mathematically catalog their inter-relationships. In most cases there are so many variables it is virtually impossible to know the inter-dependences. So the analysis is confined to a few 'major' variables. Even with less than a dozen variables, the mathematical description of the market would be a daunting, non linear, non homogeneous differential equation with non-constant coefficients. Interestingly, such an equation has the possibility of solution in the limit of a very quiet market. In that case, graphs of market variables will give straight lines (e.g. price versus weeks without rain for soybeans in their growing period). Capital Market Theory has had some success in the 'quiet markets' by assuming a market distribution function. Unfortunately, it is not the quiet markets in which the risk and potential return is significant. A general differential equation of the market is impossible to solve in closed form because the many variables are impossible to catalog along with their various interactions.

Markets are not efficient, rather they are effective - Jones