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A Random Walk Down Wall Street: The Time-Tested Strategy for Successful Investing (Tenth Edition) Hardcover – January 10, 2011
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In the tenth edition of A Random Walk down Wall Street, Malkiel evaluates and emphatically stands by his original investment thesis, that it is extremely rare for an individual investor to consistently beat the stock-market averages. Investors are better off buying and holding an index fund than attempting to buy and sell individual securities or actively managed mutual funds. An index fund which buys and sells all the stocks in a broad stock-market average is likely to outperform professionally managed funds whose high expense charges and large trading costs detract substantially from investor returns. With commentary on numerous investment issues, this readable investment guide for individuals offers information on the full range of new investment products available, the results of current research by academics and other marketplace professionals, and a section on investment strategies for retired investors or those anticipating retirement. This excellent book offers important information for individual investors and is a valuable resource for library patrons. --Mary Whaley
“Do you want to do well in the stock market? Here’s the best advice. Scrape together a few bucks and buy Burton Malkiel’s book. Then take what’s left and put it in an index fund.”
- Los Angeles Times
“Talk to 10 money experts and you’re likely to hear 10 recommendations for Burton Malkiel’s classic investing book, now in its 10th edition.”
- The Wall Street Journal
“Not more than half a dozen really good books about investing have been written in the past fifty years. This one may well belong in the classics category.”
- Forbes Magazine
“A Random Walk has set thousands of investors on a straight path since it was first published in 1973. Even if you read the book then or more recently, a refresher course is probably in order…. A lucid mix of the theoretical and the pragmatic.”
- Chicago Tribune
“Almost every list of must-read investment books…includes Malkiel’s Random Walk.”
“If one of your New Year’s resolutions is to improve your personal finances, here’s a suggestion: Instead of picking up one of the scores of new works flooding into bookstores, reread an old one: A Random Walk Down Wall Street.”
- New York Times
“An engagingly written and wonderfully argued tome.”
- Money Magazine
“Imagine getting a week-long lesson on investing from someone with the common sense of Benjamin Franklin, the academic and institutional knowledge of Milton Friedman and the practical experience of Warren Buffett. That’s about what awaits you in the latest edition of this must-read by Burton Malkiel.”
“A must-read for any investor.”
- The Browser
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I have long ago realized that though I am interested in the workings of the market, I am not going to delve to the minutiae of companies and different trades and try to be smarter than someone else on the other side who thinks he’s doing the same thing. Nope. Malkiel and Bogle figured out a way I could get away with making the most return possible with the least effort possible - indexing.
Basically this book is a defense of the efficient market hypotheses, or at least part of it. As I understand it, there are two parts to the EMF. One is that the price is always right. So that there’s no such thing as a bubble ever because all the valuations of the market price of securities are representative of their underlying value. The other part is that there’s no free lunch. Or basically arbitrage opportunities may exist, but they are not predictable nor do they persist. I think that the second part is more true than the first, and that’s what this book really digs into, showing you that there are no persistent ways to beat the market. If that’s true, then the best way to consistently make money is to just buy the market. Thankfully there are financial instruments that make that possible - and they’re where I have my money. Cards on the table, this book is just a giant exercise in confirmation bias for me, but it is confirmation bias well done in clear writing with a well-organized structure. I read this burning through the pages on a long holiday weekend, and I wanted to send it to my parents. I thought again about that. It might be too late for them since I don’t know their financial positions. Maybe I’ll send it to my siblings.
A final note, though. Even though Malkiel shows convincingly that there is no way to beat the the market, there is an odd paradox. For the market to work, it needs people out there who think that they can beat the market. Even if the best strategy is to buy and hold a low cost index fund, if everyone did that liquidity and price discovery would drop. What someone following Malkiel needs is people who think he is wrong and that they can generate “alpha” (returns above the market). This goes against the second part of the EMF, where arbitrage opportunities can’t exist because if you have a way to beat the market, then everyone has a way to beat the market and then once everyone is in, no one has a way to beat the market.
Now the tenth edition comes upon a changed world and a wiser reader. Reaction: it is even more captivating in some respects, less so in others.
More captivating: The futility of the individual investor trying to gain an information advantage over the market as a whole is even more compelling today. Investment advisors, fund managers, and many academics have a vested interest in debunking the Efficient Market Hypothesis. George Soros, for example, claims that it "has been well and truly discredited by the crash of 2008." "Markets," say the critics, "are not rational."
Of course they are not, and Malkiel never claimed they were. If "rational" means that markets correctly appraise the value of stocks as the discounted present value of future earnings, Malkiel hardly believes such value objectively exists. Valuations are nothing but forecasts ("what will earnings be in three years?") under malleable assumptions ("what is the correct discount rate?"). Just as individuals can be grossly wrong, markets collectively can be grossly wrong. Does Soros think Malkiel takes no account of bubbles? He should read the first edition which, like the tenth, opens with an exposition of the South Sea Bubble.
The Efficient Market Hypothesis simply holds that markets are very quick to gobble up and digest information--so quick that it is nearly hopeless for an individual to gain an information advantage. Moreover, fundamental analysis heavily relies on SEC filings. After a career of drafting, litigating, and teaching S1s, 10Ks, and 10Qs, I can affirm that, while outright fraud is rare, these things are filled with embedded fictions. Any investor who believes that he can apply some kind of exalted wisdom to data that is equally available to all, is deluding himself.
Less captivating: In the first edition, Malikiel pointed out that 67% of managed mutual funds fail to match the return of broad-based indexes such as the Wilshire 5000. At the time, that seemed to me a stunningly astute observation. Today, it seems banal. Begin with the statistically tautological fact that in any year 50% of funds will perform below the market and 50% above. If you subtract the higher fees and taxes that are sucked out of managed funds, that alone accounts for the difference. (Maybe 33% beat the market in Year 1. But over ten or twenty years, the percentage shrinks to a minuscule level--functionally zero.)
So Malkiel's recommended strategy of buying and holding broad-based index funds is based on nothing more than spreading risk and saving costs: the labor of research and the levy of fees and taxes. That is a useful revelation, but not as brilliant as I thought 38 years ago.
So should non-professionals give up on picking stocks? Yes, if they hope to beat the market over the long term. Yet there is nothing irrational in viewing the market as a kind of roulette table. Roulette is a slightly negative-sum game, while the stock market is a positive-sum game--about 9% positive. You can hit a streak in roulette and come out ahead from time to time. Your chances of hitting a streak in the market are even better, and the game of individual stock-picking can be fun. But we shouldn't forget that it is, as Keynes said, "a game of Snap, of Old Maid, of Musical Chairs -- a pastime in which he is victor who says Snap neither too soon nor too late, who passes the Old Maid to his neighbour before the game is over, who secures a chair for himself when the music stops."