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Random Walk Down Wall Street [Paperback]

Burton G Malkiel
3.2 out of 5 stars  See all reviews (4 customer reviews)

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Book Description

Nov. 27 2007
Updated with a new chapter that draws on behavioural finance, the field that studies the psychology of investment decisions, here is the best-selling, authoritative and gimmick-free guide to investing. Burton Malkiel evaluates the full range of investment opportunities, from stocks, bonds and money markets to insurance, home ownership and tangible assets such as gold or collectibles. This edition includes new strategies for rearranging your portfolio for retirement, along with the book's classic life-cycle guide to investing, which matches the needs of investors in any age bracket. "A Random Walk Down Wall Street" long ago established itself as the first book to purchase before starting a portfolio and this "entertaining and informative" ("Financial Times") book remains the best investing guide money can buy.

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"A classic, I know, but this preview is all about selling books and this one's already done more than a million copies... this has got to be the leading book in its field." The Bookseller "This revised new edition of the million-copy bestseller is updated with a new chapter on behavioural finance, and remains one of the best investment guides on the market... a must for students of economics." Publishing News"

About the Author

Burton G. Malkiel is the Chemical Bank Chairman’s Professor of Economics at Princeton University.

--This text refers to the Hardcover edition.

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3 of 3 people found the following review helpful
4.0 out of 5 stars Common sense for the common investor. June 23 2009
Format:Paperback
Contrary to to JVI's opinion I think this book provides valuable information for us average people. It has been proven time and again that the average low cost index mutual/ETF funds in a diversified portfolio will beat the majority of managed funds, speculators, day traders over the long term. Sure there are people who can get stellar returns, but they are few and far between, the majority lose.

You have to ask yourself this, quoted from Carl Futia (a professional speculator): "Successful speculation requires that you outguess other speculators who are probably at least as smart and experienced as you are. Why do you think you can do this? What special knowledge do you have that few other people have? What's your edge?

If you think about this question honestly you will probably conclude that you don't have an edge. And if you don't have an edge you must not speculate."
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Format:Paperback|Verified Purchase
This is a thorough book that goes through the Efficient Market Hypothesis (EMT) in great detail. It begins with a theoretical and historical coverage of the research beyond stock valuation and ends with practical solutions for the average small investor. One of the book's greatest advantages is its thoroughness. Not only does it explain the theory very well, it also delves into the advanced aspects of investing such as asset allocation strategies and ETFs. I recommend it as the first investment book anyone should read as it builds a strong foundation to help one understand investment products and services.
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4.0 out of 5 stars Good condition, but took forever to get here Feb. 2 2010
Format:Paperback
The book was almost like new, as promised, but Amazon told me my purchase would be there in a couple of weeks and instead it got here in about 4 weeks. So if you need some book soon, don't order from these guys.
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1 of 10 people found the following review helpful
By JVI
Format:Hardcover
Sum up the whole book it's saying you can't beat the market because it's efficient and don't even try it. Just buy index fund. It's call the EMT (Efficient Market Theory), the author said you can't find bargain.

According to Markiel, Benjamin Graham is wrong (he got rich twice by buying bargain), Warren Buffett doesn't exists, Walter Schloss can not make 20%+ for 40+ years and still going on....

Through out the history of finance you can find examples like say this:

Consider the case of Saucony shoes. In mid-2003, Saucony had
a market capitalization of $88 million, with net working capital of
$70 million and a beautiful headquarters building worth $10 million.
After netting out these assets, the entire company was selling for
$8 million (because one owns the assets when one buys the company).
At the time, Saucony was generating approximately $133 million in
annual sales, $7.3 million in earnings, and $13 million in free cash
' ow. And one could buy all this'in effect'for $8 million!
So, clearly, Saucony's assets were available at a bargain price. Con-
verse had recently been purchased by Nike (NKE) for one-and-a-half
times sales plus the assumption of debt. That formula would equate
to at least $200 million for Saucony, not including its $80 million in
tangible assets. During early 2004, Saucony rewarded shareholders
with a special cash dividend of $26 million ($4 per share). That was
nice enough, but the true catalyst came when Saucony was acquired
at a premium price by Stride Rite (SRR) in mid-2005.

- book exert from Art and Science of Value Investing - by Kinko's founder
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Amazon.com: 4.3 out of 5 stars  326 reviews
85 of 88 people found the following review helpful
5.0 out of 5 stars A surprisingly light read while still very informative March 31 2009
By Amazon Customer - Published on Amazon.com
Format:Paperback
Burton Malkiel's A Random Walk Down Wall Street is well known to be one of the modern classics on stock investing. I was already aware of the premise behind the book - the stock market is pretty efficient and most everyone is wasting their time trying to find inefficiencies to exploit - but I was interested in finding out what information inside could really help me as an individual, both as an investor and as a person interested in improving my personal finances. Here's what I found.

Chapter 1: Firm Foundations and Castles in the Air
The book starts off by defining two basic investment ideologies, the firm foundation theory and the "castle in the air" theory. The firm foundation theory basically says that you should invest based on the actual real value of what you're investing in; for example, if you buy a stock of Coke, it should be based on what the value of the Coca-Cola Corporation is. The "castle in the air" theory basically says that you should invest in response to what the crowds are doing and that you can make more money by riding the waves of people who are either following trends or trying to invest based on a firm foundation. Which one is right? The truth is that they both are, but at different times.

Chapter 2: The Madness of Crowds
This chapter is quite entertaining: it discusses financial "crazes" throughout history, including my personal favorite craze of all, tulipomania. In all three examples (tulipomania, the South Sea bubble, and the Wall Street crash of 1929), a market grew like gangbusters until everything was overvalued, then the values rapidly returned to normal. Graphs of prices in all three examples bear this out; within a year or two of the end of the craze, the prices had returned to roughly the same value as they were before the big run-up.

Chapter 3: Stock Valuation from the Sixties through the Nineties
Even more amusing, Malkiel continues this theme of markets that go crazy and then level off again by using several examples of cross-sections of the stock market where this occurred throughout the last fifty years. I was aware of the overvaluation of food stocks in the 1980s, for example, but to see that it has just repeated over and over again is an eye-opener. Take the Nifty Fifty from the early 1970s - people were basically speculating in blue chips, and by the end of the decade, the speculation had gone away and the stocks returned to normal blue chip levels.

Chapter 4: The Biggest Bubble of All: Surfing on the Internet
This all of course leads to the dot-com boom of the late 1990s and the bust in the early 2000s. Malkiel basically argues that this huge bubble was the result of a confluence of the same bubbles as before, all working in concert: the IPO mania that fueled the early 1960s stock market, the "smoke and mirrors" businesses of the South Sea bubble, and the chasing of future efficiencies that happened in the 1850s with railroad stocks all happened again with the dot-com businesses. And, again, it peaked and crashed and everything returned to roughly as they were before. Coincidence? Malkiel's main point in the whole book is that it's not a coincidence. Markets are efficient and time and time again, when inefficiencies occur, it won't take long for the market to weed them out.

Chapter 5: Technical and Fundamental Analysis
Given this central idea of market efficiency that's been pounded in with dozens of examples, Malkiel moves on to look at the two most common forms of analysis that occur on Wall Street: technical analysis and fundamental analysis. Technical analysis is the study of the behavior of prices on the market, using past performance to speculate on future performance, often using complex charts and trend lines. On the other hand, fundamental analysis revolves around analyzing the health of a business by carefully dissecting its financial statements, the market the business competes in, and its competitors. This chapter mostly serves as a detailed introduction to both, though it's already clear that Malkiel has somewhat more respect for fundamental analysis than technical analysis.

Chapter 6: Technical Analysis and the Random-Walk Theory
This chapter is basically a complete decimation of technical analysis; there's no other way to really put it. Perhaps the most devastating part is when he compares the stock market to the average length of a hemline in women's fashion and finds a correlation. In other words, technical analysis spends all of its time looking for correlations - but most of these correlations are spurious at best. By spending all of your time looking at charts, you're essentially cutting yourself off from a broader picture, making the spurious correlations even worse.

Chapter 7: How Good Is Fundamental Analysis?
Malkiel has at least some respect for fundamental analysis because it is based on foundational logic and is open to accepting wide varieties of data. However, he finds fundamental analysis to be deeply flawed as well. There are many reasons why fundamental analysis can be completely off base: random events (like 9/11), dubious financial data from companies (like Enron), human failings (emotional attachments and incompetence), the loss of good analysts to better positions, and so on. Basically, Malkiel concludes that professional analysts may have a slight leg up on individual investors, but this is mostly due to having more ready access to information and other materials and the advantage is minimal.

Chapter 8: A New Walking Shoe: Modern Portfolio Theory
From there, we move on to portfolio theory, which is basically the idea that people should have a diverse selection of investments and that these investments should maximize the rewards while minimizing the risk. Malkiel basically argues that it doesn't matter how much you diversify your stocks (and other assets), you are still exposed to some risk. In general, he has some respect for modern portfolio theory, but he goes on in the next chapter to point out why minimizing risk isn't always the best strategy.

Chapter 9: Reaping Reward By Increasing Risk
This was easily the most complicated chapter in the book and left me taking some lengthy breaks in the middle to digest the information. This chapter basically takes the ideas from the previous chapter and introduces a new factor: beta. Basically, beta is a number that expresses how closely an individual stock matches the behavior of the overall stock market in the past. Thus, in theory, stocks with a high beta should jump like crazy during a bull market and then dive like Greg Louganis during a downturn. With a very wide scope, this is true, but in specifics, it rarely turns out to be highly accurate.

Chapter 10: Behavioral Finance
This chapter takes a close look at behavioral finance, which applies human cognitive and emotional biases to their investment choices and thus how these biases affect overall markets. From behavioral finance, Malkiel concludes that the only parts that really work are the ones that are common sense: don't invest long term in what's hot right now, don't overtrade, and only sell stocks that are losers.

Chapter 11: Potshots at the Efficient-Market Theory and Why They Miss
Here, Malkiel walks through a series of criticisms of the overall idea of the book, which is that the market is generally very efficient and always reverts to the mean. He starts off by discarding some poor arguments and gradually moves onto better and better arguments, ending with evaluating Benjamin Graham's idea that one should identify and invest in value stocks for the long term. He easily deconstructs most of them and only has significant trouble with Graham's argument. I felt he slightly missed the boat on what Graham has to say, which is that value stocks will always have value. Malkiel points out that over a long period, both growth and value stocks do match up with the overall market, but value stocks do not have the monstrous dips that growth stocks have.

Chapter 12: A Fitness Manual for Random Walkers
This chapter is rather ordinary, as it is a basic chapter on how to build a healthy investment foundation, similar to ones that appear in most investment books. Get an emergency fund, make sure you're well insured, put as much investment as you can into accounts that are tax-sheltered (like Roth IRAs and 401(k)s), and so on - standard personal finance advice. He does strongly encourage home ownership, though. As for the question of what exactly to invest in, the next two chapters handle that.

Chapter 13: Handicapping the Financial Race: A Primer in Understanding and Projecting Returns from Stocks and Bonds
Ever heard the phrase "past performance is no guarantee of future results"? That's what this chapter is about: you can only use past performance as a very, very broad indicator of the future. In short, Malkiel believes that over a very long period, stocks will beat bonds and inflation, but with any period shorter than a decade, it's basically random and it's all about the risk you can stomach.

Chapter 14: A Life-Cycle Guide to Investing
Given that, the next chapter is basically a detailed guide on how to invest for yourself. In short, when your goal is more than a decade off, you should be heavily into stocks for the long haul, but if your goal is in the shorter term, you should be widely diversified, tending towards investments with lower risk (bonds and cash) as the big day approaches. In other words, Malkiel believes that investing in a target retirement fund is a really good idea.

Chapter 15: Three Giant Steps Down Wall Street
The book concludes with some more specific investment tips. In short, if you don't have the time to micromanage things, invest in an index fund. If you want to chase individual stocks, minimize your trading, only buy stocks that have numbers that are reasonable, and look for ones that have stories upon which people can build the "castles in the sky" mentioned in the first chapter. As for other options, like managed funds? He basically says no, or gives a very hesitant yes with a ton of caveats.

*Buy Or Don't Buy?*
We know one thing for sure: there's a ton of information packed away in this book concerning how the stock market - or any market - works. Most of the book focuses on different ways of analyzing the market to find an edge - and concludes that they're largely junk; the end of the book takes what was learned from this and applies it to investing in general.

This might sound really weighty, but it's not. This book was very easy to read, much easier than I expected before I opened the cover. There's a solid sense of humor behind it, nestled in with all the information, and the information itself is presented in a way that's easily digestible.

If you have any interest in how the stock market works, you should definitely read A Random Walk Down Wall Street. It gives a very critical look at what most people are saying about the stock market - and why a lot of it is potentially rubbish. It also clues you in on how to invest if you take that view of the world.

Of course, there are many other perspectives on the market, and the truth is that the stock market can be exploited by individuals, but that exploitation requires a lot of work, work that is simply not feasible for most people (or even for most investment professionals). While I recommend buying this book, I also recommend pairing it with a solid book on individual stock investing to get another perspective. Taking both viewpoints together will give you a very good understanding of how Wall Street - and pretty much any market - really works, and how you can either try to beat it or ride with it.
77 of 83 people found the following review helpful
5.0 out of 5 stars FOR EVERY INVESTOR Jan. 12 2011
By Carl of Netcong - Published on Amazon.com
Format:Hardcover|Verified Purchase
My review pertains to the newest 2010 edition of "A Random Walk Down Wall Street". I found it to be a well-updated classic. The author is very knowledgeable and makes a strong case for sensible investing choices using index funds and ETF's. Each chapter is peppered with experiences, jokes, and other interesting anecdotal tidbits. The old references that were fit for the 70's or 80's were purged or modified to make this book fit 2011. For the investor or anyone interested in building their own nest egg and then protecting it, this is a highly recommended book. I consider myself to be a rather experienced and seasoned investor but I learned a lot of new things reading this book. I have also read "The Little Book of Common Sense Investing" by John C. Bogle of Vanguard fame. I much prefer "A Random Walk Down Wall Street". Random is a much bigger book and will require more time to read, but it's much more thorough and less biased. If you have the time to read it, I would recommend A Random Walk over the Little Book.
47 of 52 people found the following review helpful
5.0 out of 5 stars Learn why investors do crazy stuff over and over again - and how to avoid those mistakes. Aug. 6 2007
By Elizabeth Potts Weinstein - Published on Amazon.com
Format:Hardcover
A Random Walk Down Wall Street: The Time-Tested Strategy for Successful Investing, 9th ed., by Burton G. Malkiel, is a classic and brilliant explanation of how investors make the same mistakes over and over again, and how you can avoid those mistakes. If you want to understand how the stock market works, and decide for yourself if you should be investing in index mutual funds or picking stocks, this book is a must-read.

This book is not short, but that's because it goes through the history of investing (starting in 1592! through the dot-com era), explains how professionals invest and modern portfolio theory, and how you can apply all that to your investment portfolio.

I read this book before I was an investment advisor, have re-read it since, and recommend it to my clients who want to understand how the stock market, and how investors, work.

Pros: Love the stories of early investment bubbles, like the tulip bulb bubble (yes, actual tulip bulbs) and how the dot-com bubble was just history repeating itself. Great explaination of modern portfolio theory, that a non-financial-geek can understand.

Cons: Still is pretty technical for some people, and no one could say the book is short or quick reading. Modern portfolio theory may not work in all asset classes (like international investments, though that may be changing).

What I have learned: I love sharing stories of all of the bubbles throughout history, when I'm at a cocktail party or networking event. Helps me explain to clients and press why the dot-com bubble happened, why indexing works (in some asset classes), and how someone should evaluate the fundamentals of a stock.
40 of 46 people found the following review helpful
5.0 out of 5 stars Entertaining overview of important investment concepts Aug. 3 2000
By A Customer - Published on Amazon.com
Format:Paperback
As a financial consultant in a global financial services firm, I wholeheartedly recommend this book to anyone in the markets. Burton Malkiel's central concepts still hold up in this seventh edition. He updates with stories of the latest investment follies, and uses them to back up his central assertion: investing in the capital markets requires a long-term time horizon, an understanding of the risks involved, a resistance to rushing into the latest hot trend without researching it, and some kind of investment strategy. (Those investors who trade, trade, trade on broker advice should always remember: Brokers make money on every trade in commissions-- they don't care if *you* lose all of your money.) Burton's continued support of index funds as an important part of any diversified asset strategy is backed up by good, rigorous research. Even the best active managers get burned-- Warren Buffett's hot streak finally ran out in the first half of this year, didn't it? Mean reversion does finally win out in the long run. Investors who play the stock market like the Lotto always lose out to the long-term strategists. "A Random Walk down Wall Street" is, and will always be, an immensely valuable work.
18 of 19 people found the following review helpful
4.0 out of 5 stars Great Book March 4 2001
By Abe Green - Published on Amazon.com
Format:Hardcover
Some reviewers have said that Malkiel failed to prove that the market moves in a random fashion. If so, how can one account for the 2/3 failure rate of mutual funds to beat the market? If business acumen and financial savvy were enough, why are there no mutual funds with a consistent history of beating the market? The answer is simple: present performance does not predict future returns. You should have learned this the first day of business school. Malkiel only wants people to get used to this fact, and acknowledge that anything other than a buy and hold strategy for stocks is *exactly like* playing a slot machine. Want to understand stock trends? Flip a coin one hundred times. Every time you get two or more heads in a row, you have a "trend." Heck, every time you get a head-tail-head-tail sequence you have a trend. Malkiel suggests that stock analysts waste their time and your money trying to explain such "trends" and advising you on purchases. It seems unbelievable, but 30 years of the best research in the world confirms this theory to the core. Unfortunately, the book advises you only on stocks and a few other options, not commodities, currencies, etc. But, if you like gambling, avoid this book and save your money for the analysts.
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