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A Random Walk Down Wall Street: Completely Revised and Updated Edition (Paperback)
by Burton G. Malkiel
| Category:
Investing, Wall Street, Stock market, Investment guide |
| Market price: ¥ 208.00
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| MSL Pointer Review:
A classic investment manual and an excellent introduction into academic finance. |
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Author: Burton G. Malkiel
Publisher: W. W. Norton & Company
Pub. in: January, 2003
ISBN: 0393325350
Pages: 416
Measurements: 8.4 x 5.5 x 1.2 inches
Origin of product: USA
Order code: BA00095
Other information: Revised & Updated edition
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- Awards & Credential -
An all-time bestseller (National Bestseller in North America) first published 30 years ago, now in its eighth edition. It ranks #1,287 in books on Amazon.com as of December 25, 2006. |
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- MSL Picks -
There are a lot of personal finance books that claim to have proven methodologies for successful investing. In this book, Malkiel espouses a "buy-and-hold" strategy of investing in a diversified portfolio of index funds that mirror the performance of the market as a whole. With a very structured approach, Malkiel makes a very good case for his passive investment scheme and pokes holes in the more active investment strategies such as technical analysis and fundamental analysis.
Malkiel believes that the market is efficient. By this he means that future prices are not related to historical prices and any market anomalies will be corrected in reasonable time. His best arguments for this theory are made when he deconstructs and disproves the most common critiques of the efficient market theory. His excellent treatment of market bubbles, which are often cited as arguments against efficient markets, remind us that these anomalies were all efficiently corrected in due course. Modern Portfolio Theory (which is also covered in this book) states that in efficient markets, the only way to increase returns is to increase the non-diversifiable risk of your portfolio. There is no way to consistently produce risk-adjusted returns greater than the market average. Although critics have pointed out certain investors (i.e. Warren Buffett) have in fact done this, this also is not inconsistent with the efficient market theory as random chance would predict a few success stories out of the many that play the game. Malkiel reminds us that survirorship bias leads us to remember success stories without even hearing about most failures.
As long as markets are efficient, the "best game in town" is to buy and hold index funds. Three big reasons are transaction costs, management fees, and taxes, all of which are significantly lower than in actively traded strategies. Malkiel admits that this is not very exciting and offers tips for those with "gambling temperament" to invest in individual stocks, but insists that all investors maintaining a strong core of a highly diversified portfolio of index funds.
(From quoting Sparrowhawk, USA)
Target readers:
Experienced and novice investors, finance majors, investment consultants, MBAs, anyone else who is interested in Wall Street and in investing in stock market.
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- Better with -
Better with
Devil Take the Hindmost: A History of Financial Speculation
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Burton G. Malkiel is the Chemical Bank Chairman's Professor of Economics at Princeton University.
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From Publisher
Here, in the newest edition of a perennial bestseller, Burton G. Malkiel maps a clear path through the post-dot-com financial minefield and gives individual investors the information they need to manage their money with confidence. Now more than ever, this sure-footed, irreverent, and vastly informative volume is the best investment guide money can buy. In A Random Walk Down Wall Street you will learn the basic terminology of Wall Street, how to navigate its turbulence, and how to beat the pros at their own game - with a user-friendly, long-range investment strategy that really works. Skilled in the ways of Wall Street, Malkiel shows why a portfolio of securities that simply buys and holds all the securities in a broad index is most likely to exceed the performance of securities carefully picked by professionals using sophisticated analytical techniques. Investing is too murky a venture to be undertaken without first reading this time-tested guide. You'll learn how to assemble a basic portfolio; the role that your portfolio should play alongside other financials of interest vying for your attention, such as home ownership and life insurance; and how to estimate the potential returns of the stocks, bonds, mutual funds, real estate trusts, and other items you will consider for your investment portfolio.
Savvy to irrational exuberance, deceptive sales pitches, and institutional change, Malkiel brings his characteristic clarity to this completely revised and updated edition, illuminating key decisions facing contemporary investors. Overwhelmed in choosing a fund? Decode the rating game for mutual funds, and discover the unique advantages of index funds over the wide range of riskier - and more expensive - alternatives. Concerned about the global economy? Learn the benefits that come with the risks of international investing. Feeling battered by the taxman? Capitalize on the latest opportunities for reducing, and even eliminating, the tax bite from investment earnings. This latest edition also includes an update of Malkiel's invaluable "Life-Cycle Guide to Investing," showing how to match an investment strategy to each stage of your life. Sound advice for the wary but ambitious investor, A Random Walk Down Wall Street proves once again that it is possible to be smart and rich.
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Firm Foundations and Castles in the Air
What is a cynic? A man who knows the price of everything, and the value of nothing. - Oscar Wilde, Lady Windermere's Fan
In this book I will take you on a random walk down Wall Street, providing a guided tour of the complex world of finance and practical advice on investment opportunities and strategies. Many people say that the individual investor has scarcely a chance today against Wall Street's professionals. They point to techniques the pros use such as "program trading," "portfolio insurance," and investment strategies using complex derivative instruments, and they read news reports of mammoth takeovers and the highly profitable (and sometimes illegal) activities of well-financed arbitrageurs. This complexity suggests that there is no longer any room for the individual investor in today's institutionalized markets. Nothing could be further from the truth. You can do as well as the experts - perhaps even better. As I'll point out later, it was the steady investors who kept their heads when the stock market tanked in October 1987, and then saw the value of their holdings eventually recover and continue to produce attractive returns. And many of the pros lost their shirts during the 1990s using derivative strategies they failed to understand.
This book is a succinct guide for the individual investor. It covers everything from insurance to income taxes. It gives advice on shopping for the best mortgage and planning an Individual Retirement Account. It tells you how to buy life insurance and how to avoid getting ripped off by banks and brokers. It will even tell you what to do about gold and diamonds. But primarily it is a book about common stocks - an investment medium that not only has provided generous long-run returns in the past but also appears to represent good possibilities for the years ahead. The life-cycle investment guide described in Part Four gives individuals of all age groups specific portfolio recommendations for meeting their financial goals.
What Is a Random Walk?
A random walk is one in which future steps or directions cannot be predicted on the basis of past actions. When the term is applied to the stock market, it means that short-run changes in stock prices cannot be predicted. Investment advisory services, earnings predictions, and complicated chart patterns are useless. On Wall Street, the term "random walk" is an obscenity. It is an epithet coined by the academic world and hurled insultingly at the professional soothsayers. Taken to its logical extreme, it means that a blindfolded monkey throwing darts at a newspaper's financial pages could select a portfolio that would do just as well as one carefully selected by the experts.
Now, financial analysts in pin-striped suits do not like being compared with bare-assed apes. They retort that academics are so immersed in equations and Greek symbols (to say nothing of stuffy prose) that they couldn't tell a bull from a bear, even in a china shop. Market professionals arm themselves against the academic onslaught with one of two techniques, called fundamental analysis and technical analysis, which we will examine in Part Two. Academics parry these tactics by obfuscating the random-walk theory with three versions (the "weak," the "semi-strong," and the "strong") and by creating their own theory, called the new investment technology. This last includes a concept called beta, and I intend to trample on that a bit. By the 1990s, even some academics joined the professionals in arguing that the stock market was at least somewhat predictable after all. Still, as you can see, there's a tremendous battle going on, and it's fought with deadly intent because the stakes are tenure for the academics and bonuses for the professionals. That's why I think you'll enjoy this random walk down Wall Street. It has all the ingredients of high drama - including fortunes made and lost and classic arguments about their cause.
But before we begin, perhaps I should introduce myself and state my qualifications as guide. I have drawn on three aspects of my background in writing this book; each provides a different perspective on the stock market.
First is my employment at the start of my career as a market professional with one of Wall Street's leading investment firms. It takes one, after all, to know one. In a sense, I remain a market professional in that I currently chair the investment committee of an insurance company that invests more than $250 billion in assets and sit on the boards of several of the largest investment companies in the nation, which control a total of $400 billion in assets. This perspective has been indispensable to me. Some things in life can never fully be appreciated or understood by a virgin. The same might be said of the stock market.
Second is my current position as an economist. Specializing in securities markets and investment behavior, I have acquired detailed knowledge of academic research and findings on investment opportunities. I have relied on many new research findings in framing recommendations for you.
Last, and certainly not least, I have been a lifelong investor and successful participant in the market. How successful I will not say, for it is a peculiarity of the academic world that a professor is not supposed to make money. A professor may inherit lots of money, marry lots of money, and spend lots of money, but he or she is never, never supposed to earn lots of money; it's unacademic. Anyway, teachers are supposed to be "dedicated," or so politicians and administrators often say - especially when trying to justify the low academic pay scales. Academics are supposed to be seekers of knowledge, not of financial reward. It is in the former sense, therefore, that I shall tell you of my victories on Wall Street.
This book has a lot of facts and figures. Don't let that worry you. It is specifically intended for the financial layperson and offers practical, tested investment advice. You need no prior knowledge to follow it. All you need is the interest and the desire to have your investments work for you.
Investing as a Way of Life Today
At this point, it's probably a good idea to explain what I mean by "investing" and how I distinguish this activity from "speculating." I view investing as a method of purchasing assets to gain profit in the form of reasonably predictable income (dividends, interest, or rentals) and/or appreciation over the long term. It is the definition of the time period for the investment return and the predictability of the returns that often distinguish an investment from a speculation. An excellent analogy from the first Superman movie comes to mind. When the evil Luthor bought land in Arizona with the idea that California would soon slide into the ocean, thereby quickly producing far more valuable beach-front property, he was speculating. Had he bought such land as a long-term holding after examining migration patterns, housing-construction trends, and the availability of water supplies, he would probably be regarded as investing - particularly if he viewed the purchase as likely to produce a dependable future stream of cash returns.
Let me make it quite clear that this is not a book for speculators: I am not going to promise you overnight riches. I am not promising you stock-market miracles as one best-selling book of the 1990s claimed. Indeed, a subtitle for this book might well have been The Get Rich Slowly but Surely Book. Remember, just to stay even, your investments have to produce a rate of return equal to inflation.
Inflation in the United States and throughout most of the developed world fell to the 2 percent level in the late 1990s, and some analysts believe that relative price stability will continue indefinitely. They suggest that inflation is the exception rather than the rule and that historical periods of rapid technological progress and peacetime economies were periods of stable or even falling prices. It may well be that little or no inflation will occur during the first decades of the twenty-first century, but I believe investors should not dismiss the possibility that inflation will accelerate again at some time in the future. We cannot assume that the European economies will continue to have double-digit unemployment forever and that the deep recessions in Japan and many emerging markets will persist. Moreover, as our economies become increasingly service oriented, productivity improvements will be harder to come by. It still will take four musicians to play a string quartet and one surgeon to perform an appendectomy throughout the twenty-first century, and if musicians' and surgeons' salaries rise over time, so will the cost of concert tickets and appendectomies. Thus, it would be a mistake to think that upward pressure on prices is no longer a worry.
If inflation were to proceed at a 3 to 4 percent rate - a rate much lower than we had in the 1970s and early 1980s - the effect on our purchasing power would still be devastating. The following table shows what an average 4.8 percent inflation has done over the 1962-88 period. My morning newspaper has risen 1,100 percent. My afternoon Hershey bar has risen even more, and it's actually smaller than it was in 1962, when I was in graduate school. If inflation continued at the same rate, today's morning paper would cost more than one dollar by the year 2010. It is clear that if we are to cope with even a mild inflation, we must undertake investment strategies that maintain our real purchasing power; otherwise, we are doomed to an ever-decreasing standard of living.
Investing requires a lot of work, make no mistake about it. Romantic novels are replete with tales of great family fortunes lost through neglect or lack of knowledge on how to care for money. Who can forget the sounds of the cherry orchard being cut down in Chekhov's great play? Free enterprise, not the Marxist system, caused the downfall of Chekhov's family: They had not worked to keep their money. Even if you trust all your funds to an investment adviser or to a mutual fund, you still have to know which adviser or which fund is most suitable to handle your money. Armed with the information contained in this book, you should find it a bit easier to make your investment decisions.
Most important of all, however, is the fact that investing is fun. It's fun to pit your intellect against that of the vast investment community and to find yourself rewarded with an increase in assets. It's exciting to review your investment returns and to see how they are accumulating at a faster rate than your salary. And it's also stimulating to learn about new ideas for products and services, and innovations in the forms of financial investments. A successful investor is generally a well-rounded individual who puts a natural curiosity and an intellectual interest to work to earn more money.
Investing in Theory
All investment returns - whether from common stocks or exceptional diamonds - are dependent, to varying degrees, on future events. That's what makes the fascination of investing: It's a gamble whose success depends on an ability to predict the future. Traditionally, the pros in the investment community have used one of two approaches to asset valuation: the firm-foundation theory or the castle-in-the-air theory. Millions of dollars have been gained and lost on these theories. To add to the drama, they appear to be mutually exclusive. An under- standing of these two approaches is essential if you are to make sensible invest- ment decisions. It is also a prerequisite for keeping you safe from serious blunders. During the 1970s, a third theory, born in academia and named the new investment technology, became popular in "the Street." Later in the book, I will describe that theory and its application to investment analysis.
The Firm-Foundation Theory
The firm-foundation theory argues that each investment instrument, be it a common stock or a piece of real estate, has a firm anchor of something called intrinsic value, which can be determined by careful analysis of present conditions and future prospects. When market prices fall below (rise above) this firm foundation of intrinsic value, a buying (selling) opportunity arises, because this fluctuation will eventually be corrected - or so the theory goes. Investing then becomes a dull but straightforward matter of comparing something's actual price with its firm foundation of value.
It is difficult to ascribe to any one individual the credit for originating the firm- foundation theory. S. Eliot Guild is often given this distinction, but the classic development of the technique and particularly of the nuances associated with it was worked out by John B. Williams.
In The Theory of Investment Value, Williams presented an actual formula for determining the intrinsic value of stock. Williams based his approach on dividend income. In a fiendishly clever attempt to keep things from being simple, he introduced the concept of "discounting" into the process. Discounting basically involves looking at income backwards. Rather than seeing how much money you will have next year (say $1.05 if you put $1 in a savings bank at 5 percent interest), you look at money expected in the future and see how much less it is currently worth (thus, next year's $1 is worth today only about 95¢, which could be invested at 5 percent to produce approximately $1 at that time).
Williams actually was serious about this. He went on to argue that the intrinsic value of a stock was equal to the present (or discounted) value of all its future dividends. Investors were advised to "discount" the value of moneys received later. Because so few people understood it, the term caught on and "discounting" now enjoys popular usage among investment people. It received a further boost under the aegis of Professor Irving Fisher of Yale, a distinguished economist and investor.
The logic of the firm-foundation theory is quite respectable and can be illustrated best with common stocks. The theory stresses that a stock's value ought to be based on the stream of earnings a firm will be able to distribute in the future in the form of dividends. It stands to reason that the greater the present dividends and their rate of increase, the greater the value of the stock; thus, differences in growth rates are a major factor in stock valuation. Now the slippery little factor of future expectations sneaks in. Security analysts must estimate not only long-term growth rates but also how long an extraordinary growth can be maintained. When the market gets overly enthusiastic about how far in the future growth can continue, it is popularly held on Wall Street that stocks are discounting not only the future but perhaps even the hereafter. The point is that the firm-foundation theory relies on some tricky forecasts of the extent and duration of future growth. The foundation of intrinsic value may thus be less dependable than is claimed.
The firm-foundation theory is not confined to economists alone. Thanks to a very influential book, Graham and Dodd's Security Analysis, a whole generation of Wall Street security analysts was converted to the fold. Sound investment management, the practicing analysts learned, simply consisted of buying securities whose prices were temporarily below intrinsic value and selling ones whose prices were temporarily too high. It was that easy. Of course, instructions for determining intrinsic value were furnished, and any analyst worth his or her salt could calculate it with just a few taps of the calculator or personal computer. Perhaps the most successful disciple of the Graham and Dodd approach was a canny midwesterner named Warren Buffett, who is often called "the sage of Omaha." Buffett has compiled a legendary investment record, allegedly following the approach of the firm-foundation theory.
The Castle-in-the-Air Theory
The castle-in-the-air theory of investing concentrates on psychic values. John Maynard Keynes, a famous economist and successful investor, enunciated the theory most lucidly in 1936. It was his opinion that professional investors prefer to devote their energies not to estimating intrinsic values, but rather to analyzing how the crowd of investors is likely to behave in the future and how during periods of optimism they tend to build their hopes into castles in the air. The successful investor tries to beat the gun by estimating what investment situations are most susceptible to public castle-building and then buying before the crowd.
According to Keynes, the firm-foundation theory involves too much work and is of doubtful value. Keynes practiced what he preached. While London's financial men toiled many weary hours in crowded offices, he played the market from his bed for half an hour each morning. This leisurely method of investing earned him several million pounds for his account and a tenfold increase in the market value of the endowment of his college, King's College, Cambridge.
In the depression years in which Keynes gained his fame, most people concentrated on his ideas for stimulating the economy. It was hard for anyone to build castles in the air or to dream that others would. Nevertheless, in his book The General Theory of Employment, Interest and Money, he devoted an entire chapter to the stock market and to the importance of investor expectations.
With regard to stocks, Keynes noted that no one knows for sure what will influence future earnings prospects and dividend payments. As a result, Keynes said, most persons are "largely concerned, not with making superior long-term forecasts of the probable yield of an investment over its whole life, but with foreseeing changes in the conventional basis of valuation a short time ahead of the general public." Keynes, in other words, applied psychological principles rather than financial evaluation to the study of the stock market. He wrote, "It is not sensible to pay 25 for an investment of which you believe the prospective yield to justify a value of 30, if you also believe that the market will value it at 20 three months hence."...
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Chicago Tribune (MSL quote), USA
<2006-12-25 00:00>
A classic… has set thousands of investors on straight path since it was first published… Even if you read the book a refresher course is probably in order. |
Forbes (MSL quote), USA
<2006-12-25 00:00>
Not more than half a dozen really good books about investing have been written in the past fifty years. This one may well be in the classics category. |
Library Journal (MSL quote), USA
<2006-12-25 00:00>
Why would anyone want to invest in the stock market today? Malkiel (economics, Princeton) was trying to answer that very question when he first published this book in 1973. Over the years, the work has proved to be a hardy perennial among amateur and professional investors alike-and it's gratifying to see it bloom once more, offering ample updated information. Malkiel takes an academic, no-non- sense attitude toward Wall Street, emphasizing a more random approach to stock selection and thereby debunking a lot of the more technical methods people use to decipher the stock market. He advocates sticking to index fund investments, as well as diversifying one's portfolio, frequently reminding the reader that a "buy- and-hold-strategy" has higher returns. Of course, it's only human nature to want to make a killing in the stock market and "throw your money away on short, get-rich- quick speculative binges." But Malkiel argues that this makes no sense, and he dramatically emphasizes his point by examining the various historical investment bubbles and their staggering losses. Malkiel has a somewhat didactic style-he occasionally sounds as if he's shaking his finger at the reader-but his message continues to resonate. |
Alex Rothenberg (MSL quote), USA
<2006-12-25 00:00>
Burton G. Malkiel's Random Walk, first published over 30 years ago, is now a classic text on investing and is surely worth anyone's time and effort. Simply written, Malkiel conveys the debate over the validity of the efficient market hypothesis with ease and effectiveness; this edition's updated comments on the dot-com craze are insightful and probably worth the price of the book themselves.
While I support the view that fundamental and technical analysis generally offer very little in the way of helpful advice, I believe that Malkiel's view that no investment strategy can beat the market over the long run is, to put it simply, irrefutable. Therein, however, lies its problem.
Suppose, for instance, that I have this remarkable strategy of buying and selling stocks which has earned me consistant long run returns on the market. Of course, if I tell anyone the specifics of this strategy and how wonderful it works, they will want to start using it for themselves. But then my strategy will stop working; the more people use a particular strategy, the harder it is for that strategy to continue work. Malkiel himself notes that if everyone uses the strategy of buying stocks on January 1st and selling them five days later, a simple strategy of buying on December 31st and selling on the 4th will generate consistant, long run returns. But then, if everyone adopts the new strategy, the long run returns vanish!
The key to a successful investing strategy, then, is to keep it secret. Since any strategy published in Malkiel's "Random Walk" is likely to be read and studied by millions, the moment he publishes something that would refute the efficient market hypothesis, the hypothesis is again reconfirmed. Clever devil, that Malkiel.
Other than that, my only problem with Malkiel's book is that he refers to countless articles and studies published in academia, but he leaves the inquiring reader clueless as to where to look for them. A simple "references" section would solve this problem (although it would easily provide further reason to justify publishing a new edition, thus earning Malkiel even more money).
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