The Random Walk Guide To Investing [Paperback]

Burton G. Malkiel (Author)

Book Description

Publication Date: January 30, 2007

Simply put, the essential first book for any investor.

Based on the million-copy seller A Random Walk Down Wall Street, this concise new guide by influential and irreverent author Burton G. Malkiel takes the mystery out of personal finance by outlining Malkiel's own ten-point plan for success. Easy to read and easy to follow, this practical book aimed at the investment novice cuts through the jargon to give readers the confidence and knowledge to make wise investment decisions that will provide consistent returns.

Editorial Reviews

Review

Wake up to the nasty little secrets of Wall Street...and start using these 'ten rules for financial success.' -- CBS MarketWatch

About the Author

Burton G. Malkiel is the Chemical Bank Chairman's Professor of Economics at Princeton University. He is a former member of the Council of Economic Advisers and has served on the boards of several major corporations.

Product Details

• Paperback: 224 pages
• Publisher: W. W. Norton & Company; Reprint edition (January 30, 2007)
• Language: English
• ISBN-10: 039332639X
• ISBN-13: 978-0393326390
• Product Dimensions: 5.6 x 0.5 x 8.3 inches
• Shipping Weight: 6.4 ounces (View shipping rates and policies)
• Average Customer Review: 4.6 out of 5 stars  See all reviews (36 customer reviews)
• Amazon Best Sellers Rank: #37,224 in Books (See Top 100 in Books)

More About the Author

Burton G. Malkiel is the Chemical Bank Chairman's Professor of Economics at Princeton University. His books include "From Wall Street to the Great Wall," "Naked Economics," "The Random Walk Guide to Investing," and the mega-bestseller "A Random Walk Down Wall Street."

Most Helpful Customer Reviews

285 of 290 people found the following review helpful

5.0 out of 5 stars This is the best investment guide I have read yet. August 31, 2003

By Gaetan Lion TOP 1000 REVIEWER

Format:Hardcover

Burton Malkiel is the author of the incredibly successful investment theory book "A Random Walk Down Wall Street" first published in 1973. Thirty years later, his publisher suggested he writes an investment guide capturing the wisdom from "A Random Walk" in a shorter tome aimed at the layperson. Malkiel did exactly that. In this book, he does a beautiful job in avoiding statistics out of reach for the layperson. Yet the investment advice remains sharp and relevant.

Malkiel covers a lot of ground in investments, financial planning, retirement, savings for college, and insurance in just 180 pages. He structures this knowledge through just ten basic rules. Throughout, he includes numerous useful tools. One is the famous rule of 72. If you divide 72 by the investment return, it will tell you how many years it takes to double your investment. Thus, Malkiel covers all the basics and also explores the cutting edge of behavioral economics from the luminaries in this field including Robert Shiller (Irrational Exuberance) and Richard Thaler. This book is just as interesting to the layperson and the investment professional alike.

Malkiel advice can be summarized as follows. Save regularly through 401Ks and other means. Invest in low cost mutual funds and index funds across four asset classes (money market funds, bonds, stocks, and REITs). Invest according to your optimal asset allocation which reflects your time horizon (driven by your age), your financial capacity to absorb losses, and your risk tolerance. Take full advantage of tax advantage investments, including 401Ks, IRAs, Education Savings Accounts. The book includes many more fascinating aspects of investing.

Malkiel outlines eloquently the benefits of index funds. They incur lower operating costs.... They have lower turnover, which leads to lower transaction costs and greater tax efficiency. Consequently, index funds beat actively managed funds by 2 percentage points. Malkiel states this superior performance is a direct result of index funds low cost advantage. The higher cost handicap of actively managed funds is insurmountable over time. As a result, the S&P 500 index beats out 84% of large cap mutual funds over 10 years, and 88% over 20 years.

This leads to one of Malkiel most surprising point. Two investors investing $1,000 in an IRA earning respective returns of 6% and 8%; the investor earning 8% will have more than twice as much money in his account after 40 years ($21,725 vs. $10,286). I thought Malkiel made a typo. I calculated the figures, and he did not. This has huge implication in a long term investment environment where single digit returns will become the norm. Costs matter a lot!

On diversification Malkiel includes much original intelligence. He makes a strong case that international diversification is not all what it is cracked up to be. This is because international stock markets move increasingly together when the U.S. one experiences a downturn. Also, he mentions that REITs provide excellent diversification benefits (better than international stocks). I have personally done much research on this subject, using regression analysis. And, Malkiel is correct, even though this fact is unknown to Wall Street.

Malkiel recommends different asset allocations for different age brackets (Life-Cycle investing). He tracks how these different asset allocations performed over the past 20 years (January 1983 to December 2002). It is stunning to note that the most aggressive asset allocation targeted to young people with a 65% stock exposure would have earned a 11.52% return or only one percentage point greater than the most conservative one targeted at senior citizens with only 25% stock exposure which earned a 10.51% return. On the other hand, the most aggressive asset allocation would have suffered 20 quarterly losses with the worst one being minus 14.5%; meanwhile the most conservative asset allocation would have incurred only 16 quarterly losses with the worst one being only minus 5.0%. This gives you pause on how much additional risk is it worth taking.

Malkiel does also a credible job of explaining the superior long term performance of Warren Buffet and Peter Lynch despite the efficiency of the markets and the overall superiority of index funds. Of the two, he states that Peter Lynch record is much less impressive.

He attributes much of Lynch record to the laws of randomness. If you have a 1,000 coin flippers and you make them flip a coin 10 times in a row, you will have one coin flipper who will have flipped tails 10 times in a row. He will be perceived as a genius. But, he was just lucky. Observing Peter Lynch record, his hand got progressively colder as his Magellan fund became larger and his tenure lengthened. This is exactly what Malkiel expected. Lynch genius was to retire close to the top. He retired at the young age of 46, when his record viewed over his tenure could still be perceived as legendary.

Warren Buffet case is completely different. In Malkiel view, he is not so much an investment genius, as a businessman. Buffet has often intervened in running the companies in which he invested when they were faltering. This was the case for the Washington Post, Salomon Brothers, and many other companies Buffet invested in. So, to compare Buffet?s record to the S&P 500 is comparing apples and oranges. Buffet record can't be replicated by any regular investors who have no control over the companies they invest in. Read more ›

50 of 52 people found the following review helpful

5.0 out of 5 stars A wonderful foundation for building your financial future June 7, 2005

By Craig Matteson HALL OF FAMETOP 500 REVIEWER

Format:Paperback

It is sad to think about all the trees that have been felled to provide the paper to print so many thousands of useless books on investing. Very few of them provide the investor with the truth about the market and what that implies for their financial future. Those that push a system for beating the market or complicated strategies should be ignored. Others who advocate the advantages of leverage rarely explain the true magnitude of the risk being taken on by the investor nor explain why these investments are almost never a good idea for a retirement account.

This book is a delightful exception and I recommend it to everyone as a great first guide to getting yourself on a solid path to financial security and some truly golden years. It is simple to read, contains just the bare minimum of financial terminology and therefore stays intelligible to the average person looking for the truth about their money.

What I like about the approach taken in the ten rules put forward by Burton Malkiel is their universal applicability and the power it puts in the hands of each investor. Of course, it also puts responsibility for his or her financial future in those hands as well. The rules focus on starting to save early, saving in ways that keep your costs low, diversifying your savings so when one bad thing happens it only stings you instead of destroying your future.

The author provides helpful guidelines for building a diversified portfolio to your personality profile and tolerance for risk. I also liked his discussion of portfolio mix related to your age and where your financial interests should be in the various decades of your life. He also suggests working a few extra years and why that could make a big difference.... He wants investors to pay themselves and to carefully use every tax advantage they are entitled to. He also doesn't want you to spend money on tip sheets, investment guides, or an investment advisor.

You probably know that the "random walk" portion of the title comes from Prof. Malkiel's wonderful book "A Random Walk Down Wall Street" in which he demonstrates that the market is usually extremely efficient and why even experts usually fail to provide even market returns (those pesky charges they make you pay them for providing a market return) and why index funds are the way to go for the average investor.

The last chapter on stupid investor tricks is terrific. This is a great first book for any investor. Young people especially should start here and absorb its teachings into the marrow of their bones. The author provides a wonderful quote by Woody Allen: "A stockbroker is someone who invests other people's money until it is all gone." And notes a story from the past when an investor was being wooed by an investment banking house who showed them all the trappings of their wealth and a tour of the bankers' yachts. Their idea was to make him feel secure about placing his money with them. However, he investor asked the salient question, "Where are the investors' yachts?" There you have it.

Strongly and emphatically recommended. Read more ›

15 of 17 people found the following review helpful

5.0 out of 5 stars This is one of my most recent reads April 7, 2006

By Stephen M. Geraci

Format:Paperback

I have read several books on personal finance and investing. However, I have never read the classic a Random Walk Down Wall Street. I picked it up in the book store one day and realized right away it was too technical and dry for me. Then I came across this beauty (based on the classic) and it takes the same wisdom from that book and makes it easy for people who hate the technical stuff. I have been very successful in personal finance and it is a big hobby of mine. I love reading these books. This one is simply one of the best on the subject. However, if you are one of those people who hate the idea of an efficient market and like the thrill of day trading, you will hate this book.

13 of 15 people found the following review helpful

5.0 out of 5 stars Extremely Helpful January 10, 2006

By Linda Stevens

Format:Paperback

My husband and I have been living below our means (as it talked about in Millionaire Next Door) and of course were confused about where to put our savings.

At first we bought various stocks. But unfortunately the companies we thought were "sure things" weren't so great after all. In 2004 we actually lost money in our portfolio, even though the market as a whole did better than that.

After that we tried putting our money into a managed mutual fund. But with the high expense ratio -- combined with the capital gains taxes from all the trading done by the "hotshot" brokers in charge of the fund -- we barely made better than the inflation rate!

Then an MBA friend of ours recommended this book, and it was absolutely life changing. Malkiel explains why broadly-diversified index funds are the way to go. I won't repeat his reasoning here, but it's absolutely spot on.

Since we've taken Malkiel's advice and switched everything over to index funds, we're finally making the market rate of return. Investing is now a no-brainer, and on a long enough timespan, we WILL now become rich.