Customer Review

40 of 59 people found the following review helpful
2.0 out of 5 stars This book has appeased the masses over several decades, at the same time professionals have profited handsomely. Disgusting., August 12, 2011
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This review is from: A Random Walk Down Wall Street: The Time-Tested Strategy for Successful Investing (Tenth Edition) (Hardcover)
Many years ago I bought this book about the stock market. In retrospect, it is the worst book I've ever bought because it made me believe in efficient capital markets. The author made his point with a lot of arrogance - just like finance professors did 15-20 years ago. At the time the markets very certainly not as efficient as the author believed. There have been several updates to the book, but the condescending voice of the author remains.

For the statistically interested, the problem with a lot of old finance (and also not so old) research was that it was testing the theory that the market was efficient. That is poor philosophy of science. You should always test the opposite of what your theory stipulates. If you can reject the opposite, your theory is as supported as it can be (standard Popper). The finance profession in their ignorance of philosophy of science tested it the other way around. This means that they could too easily conclude that the markets were efficient. Not a word about such complications in this book. Why is this relevant? I would say that the author is less critical of research that supports his preconceived opinion (as stated in the first edition of the book).

I did not realise this bias when I first read the book. Instead, I believed the author's conclusion that the markets must be so efficient that it is fruitless to try to beat them. That was and is just plain silly. The markets are of course tending towards efficiency, so it is not easy to beat them. This is an important point. However, to state that they are efficient is just plain arrogant. So while there are some very good critical analyses in this book, ultimately it might make you believe in something that is very costly: That you cannot make more money in the stock market unless you are willing to take on a higher level of risk.

Currently a lot of academics are questioning the efficient markets. This research is not taken seriously by the author. I am reminded of Kuhn's comment that the new paradigm only becomes prominent when the old guard dies/retires. Furthermore, a lot of people with a PhD in finance start hedge funds to exploit anomalies in the market place instead of writing academic articles. Wouldn't this be worth serious consideration by the author? Still, there is still room for other inefficiencies. For instance the role of emotions is totally disregarded by academic-finance number-crunchers.

The author also has advice of how to invest. His view is to buy low-cost mutual funds. This is not awful advice, but still why would you buy mutual funds when the average fund doesn't even return average market returns? The only thing you know is that they take 1-3% in management fees every year. Do compound interest on that! In The Financial Times, the author recently argued that stocks in emerging markets are undervalued. It is hard to believe in efficient markets and write an investment column. So he just assumes (contrary to his book) that the markets are inefficient and have not priced those stocks correctly. Check out recent videos from 2011. He says that he believes in efficient markets when it comes to publicly available information. Then he proceeds to state that people in 1999 bought the wrong kind of stocks (Internet, technology), which were overvalued. Yes, I would agree those stocks were in a bubble. But honestly, then you cannot believe in efficient markets. These blaring inconsistencies are remarkable.

If you have read this far and want to give me negative feedback, be my guest. I posted a version of this review on an earlier edition of the book, and the review got trashed be believers. When you get a lot of negative feedback on a negative review on amazon that tells you the author has a lot of worshippers. That should make you worried.

A more rational response would be to read Justin Fox's The Myth of the Rational Market. It tells a much more nuanced narrative about the efficiency of capital markets and prominent academics role in developing ideas and theories. The style of the book is not preachy at all. His stories show academic finance to be a very dogmatic environment in the 80s and 90s. You could be called a communist by the stars in the field and have your chances of employment reduced if you didn't sign up to the belief that markets are efficient. It is all described in Fox's book. Or read Shiller's Irrational Exuberance describing how bubbles have been removed from finance textbooks and PhD syllabi because they doesn't fit with the rational actor model. He has the following to say about the efficient market hypothesis: "one of the most remarkable errors in the history of economic thought". Or read Montier's Behavioural Investing: A Practitioners Guide to Applying Behavioural Finance (The Wiley Finance Series) (or his other books) for more evidence of imperfect markets. Or read Dreman's column in Forbes magazine.
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Showing 1-9 of 9 posts in this discussion
Initial post: Nov 9, 2011 5:49:13 AM PST
JimN says:
Jackal,

This is a good review, and I'm grateful to you for it. Do you know of any books that give investing advice but that don't adopt the efficient market philosophy? The two books you linked to look interesting, but don't seem to give very specific advice. Thanks.

In reply to an earlier post on Nov 9, 2011 6:01:04 AM PST
Jackal says:
There is a strong push towards efficiency in the markets so it is not easy to beat the markets. CXO Advisory has a paid blog that catalogues the research on biases in the market. It is quite heavy reading (and with an efficient market bias), but gives a good overview of what is currently going on in the field of finance. Best is to develop your unique approach based on whatever knowledge you have (or develop). I like to short companies which have a strategy that I think is poor (and I believe the stock market generally is slow in realising bad strategies). I also like to trade some currency because I follow a lot of world politics and economics. This is all fairly short term and I don't think I have an advantage in long term investing. This suits me, but you need to develop your own edge whatever that might be. Please also check my list of books on trading here on amazon.

Posted on Dec 1, 2011 1:25:11 PM PST
The Eric says:
I also found it's hard to understand that in an earlier chapter, the author urged to sell the losers; and later he showed that re-balancing your investment periodically will give you an edge. Re-balancing basically does exactly the opposite of "selling the losers".

Posted on Dec 21, 2011 9:48:57 AM PST
There is a lot of confusion about what it means for the market to be "efficient". Many people seem to think that it means the market is "right", but that is not the case. What it actually means is that the market does not have large, systematic inefficiencies which can be exploited for reliable profits. You seem to understand this, because you are aware that mutual funds do not beat the market. A mutual fund, by the way, is a systematic attempt to "prove the opposite".

Of course, it is possible (perhaps even likely) that there are individuals who are aware of, and exploit, systematic inefficencies. If so, they have more sense than to write books about it.

Posted on Feb 14, 2012 12:07:20 PM PST
Andrew Furst says:
Great review, Jackal. It's good to see someone intelligently point out the flaws of this investment "classic". I wrote a couple of lengthy responses to a 5-star review here, the March 2, 2011 one titled "Random Intersection of Main Street & Wall Street". Some of my points there were similar to yours, some different. I'm somewhat astounded that there are so many people who rate this book 5-stars and attack those who question the "wisdom" presented by Malkiel. I guess most people only want to review books they loved, but it's great to also see another view, very well presented as you have done here.

Posted on Mar 22, 2012 7:07:01 PM PDT
J Weissman says:
Agreeing with Raphael Thurmond in the comments, there is misunderstanding about "efficient". IMO, "efficient" refers to resistence and support, prices where acutual peeps own a stock. When support or resistence breaks one way or the other inefficiency, or less efficiency, is created. The "stability" of "price information" is represented by support or resistence. No matter why these structures exist, they are not sacrosanct, nor are they necessarily violable. The truth is, stocks and "the markets" swing between efficient and not efficient. Sometimes the "market" is efficient--tho, according to what random measures?"--and sometimes the "market" is not efficient. Yin and yang, yin and yang. Great review. Thanks.

In reply to an earlier post on Mar 23, 2012 2:15:08 AM PDT
Jackal says:
@John. Efficient has a specific meaning in finance and it is not at all similar to your definition.

@Raphael. Efficient mean no possibility at all to exploit for reliable profit. Enough evidence has accumulated for this statement to be discarded. Just have a look at Jeremy Grantham's (GMO) latest quarterly letter for one piece of evidence.

Posted on Apr 11, 2012 8:16:58 AM PDT
AR says:
Jackal,

What you miss is that everyone, including Fox, also makes the claim that investors are also irrational and are therefore not able to beat the market. There is no claim made by Fox that you should try to be more rational than the market and try to beat it.

In reply to an earlier post on Apr 11, 2012 10:28:19 AM PDT
Jackal says:
@Adam. Malkiel claims that the market is rational because he is convinced that the efficient market hypothesis is correct. Fox argues that the market is not always rational. Fox's book is not about investing so he does not say anything about what investors should do. I fully agree that there there is a lot of irrationality among investors. That is why so many people now find that the markets are not always rational.

Malkiel has the arrogance of somebody that knows the truth. He argues for the impossibility of being more rational than the market. While I agree that it is difficult to be more rational than the market, it is certainly not impossible.
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