on May 2, 2001
I definitely recommend this book. All investors should understand the Efficient Market Theory and know what it presumably implies. Oddly enough though, I do not subscribe to the theory. The reason most fund managers fail to beat passive indexes is simply because of 1)fees, 2)not adhering to a rational investment approach, 3)buying what everyone else is buying (which goes with #2). The simple fact is that inefficiences in the market, due to the short term emotional whims of investors, DO create buying opportunities, and the records of people like Lynch, Buffett, Graham, Neff, Miller and others is proof of this. Malkiel writes off these exceptions to his theory as luck. What is interesting though is that no successful stock picker ever subscribed to EMT and no EMT adherent has ever been a successful stock picker. A theory that can only explain its violations by saying it was chance is a very weak theory. Read this book, but don't be fooled by it. Read lots of other books by Lynch, Neff, books on Buffett, John Train, etc. These will be a good balance. Lastly, remember Malkiel is an academician, not a practitioner. His ivory tower perspective is hardly the last word on the subject. I would especially recommend reading the letters of Buffett to Berkshire Hathaway stock holders. Buffett in effect says to the Efficient Market theorists: "If you're so smart, how come I'm so rich?"
on March 22, 2001
As we are experiencing the bursting of another stock market bubble (the dot-com craze), Burton Malkiel's insights - first expressed in the first edition nearly 30 years ago - remain as pertinent as ever. Want to know why "reversion to the mean" is inevitable? Read Malkiel's descriptions of "The Tulip Bulb Craze", The "New Era" of the 1960's, and his insights into the dot-com craze (published before the 2000-2001 sell-off).
Burton Malkiel correctly states that stock markets are not always rational, but that markets do over time correct themselves. He successfully presents a rational case that true value is eventually recognized by the market and this is "the lesson that investors must heed."
This book explores in more detail than many others the underpinnings of efficient market theory and its implications for the individual investors. Should you have any doubts about the value of adopting a long-term strategy of matching, and not attempting to beat, the market, then you should read this book.
In terms of practical application to actual investment decisions, the text not only sets forth efficient market theory but also concludes with some insightful observations about low-cost stock index funds and, if you must, how to play the game of choosing individual stocks.
There will be a few people who have beat the market, and will beat the market in the future. As Malkiel notes, statistics tell us that a very few individuals and investment managers will randomly beat the market over a ten year period. But this is part of the randomness, not the counter to the underlying theory. Regarding the reviews posted on Amazon's site by individuals who seemingly reject Burton Malkeil's random walk theory - let's ask them again in 20 years what they think then, and I bet 9 of 10 of these individuals would have been better off (under an objective analysis) following the principles expressed in "A Random Walk Down Wall Street".
This book is a classic. Consider it and similar well-written others by John Bogle (Common Sense on Mutual Funds) and Larry Swedroe (What Wall Street Doesn't Want You To Know) as a core part of your library and a foundation of your knowledge on investing. After reading the foregoing, consider exploring more advanced texts - such as Bernstein's "The Intelligent Asset Allocator" and Bruce Temkin's insightful "The Terrible Truths About Investing." All of these books owe homage to the foundations laid down by Burton Malkiel some 30 years ago. Buy this most recent edition, and learn to avoid the next madness of the crowd.
on July 6, 2001
I wish I had read this book sooner. If you are considering investment in anything other than a broadly diversified index fund and holding it for the long term through the inevitable downturns then you would be well advised to read this book.
Put simply, Malkiel's argument is that buying and holding an index fund is the easiest way for the average joe to make money in the market if they are willing to hold on tight during the market dips. He does not discourage the outright purchase of individual securities as well as other more risky financial instruments, but he does demonstrate that the odds are stacked against you for long term success in such endeavors when all the pitfalls are considered (i.e. capital gains taxes, brokerage commissions, the utter folly in trying to time your buys/sells, your ability to sleep soundly, etc.).
I would also point out that the book is not without it's more technical sections. Much of it involves some minor mathematical examples. Nothing beyond the level of high school algebra and statistics, but if you are not enthralled with such a prospect then you might look for something more fuzzy such as The Motley Fool Investment Guide by the Brothers Gardner or One Up On Wall Street by Peter Lynch. Both of these works also herald the index fund while offering suggestions for individual stock picking strategies for the more daring/foolish/Foolish among us.
Overall you may find this book to be iconoclastic in it's approach to the Wall Street Wise. Remember that the majority of mutual funds have underperformed the market averages over the long term - food for thought.
on March 4, 2001
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.
on January 31, 2001
"I believe the stock market is fundamentally logical." This quote by Burton Malkiel from his book A Random Walk Down Wall Street is the one of the main tenets of the Random Walk Theory. Randomaniacs (my pet name for those who boldly hold to the Random Walk theory) believe the market instantaneously, and efficiently, prices all known news into stock prices at all times, making it futile to search for exploitable stock market situations. Analyzing trends, economic conditions, interest rate levels, etc., is pointless. The market is so efficient one cannot find anomalies or trends that can offer market-beating performance without accepting loads of extra risk.
Malkiel would also have you believe that
1. You cannot consistently outperform the market without increased risk 2. It is better to hold an index fund rather than individual stocks (unless the stocks are a true proxy for the index) Markets get irrational (but not inefficient) and attract unwary investors 3. The disciplines of fundamental and technical analysis are not effective analytical investment tools "...a blindfolded chimpanzee throwing darts at the Wall Street Journal can select a portfolio that performs as well as those managed by the experts." 4. The risk in most investments decreases with the length of time the investment can be held
Being ex Wall Street, I have had a chance to make a living within our "efficient markets." My practical experiences have taught me that there are efficiencies, but the market itself is not efficient to the degree most think. While there seems little doubt that a certain amount of randomness or "noise" does exist in all markets, it is just unrealistic to believe that all price movement in random.
How, for example, would a buy and hold strategy fare in the futures markets where timing is so critical? How would investors know the difference between bull and bear markets if prices are unpredictable and don't trend? In fact, how could a bear market even exist in the first place because that would imply a trend? Give these questions some thought:
1. Has the market been efficiently pricing Internet stocks (are they really worth that much)? 2. Why does the market have "curbs" or "circuit breakers" to temporarily cease trading when it has dropped too far? 3. If you buy a stock at $12 share, and it drops to $6 shortly thereafter, are you going to sell it when it gets back to $12 (come on, be honest!)? 4. If a large number of investors are technicians (use charts to determine entry and exit points from stocks), won't their analysis have a fundamental effect on the market?
Is history a good teacher (I touched the hot frying pan, I burned my finger...I wont do that again!)? Sure it is. Why can't it be a good teacher for the stock market (ergo the use of charts and other technical indicators)?
Malkiel regularly alludes to the element of risk and beta. He believes that beta (a stocks relative volatility or sensitivity to the market) does capture at least some aspect of what we normally think of as risk. His conclusion is that "Investors should scoop up low-beta stocks..." but not use beta as a "...substitute for brains and cannot be relied on as a simple predictor of long-run future returns." Surely, if by definition beta is a backward-looking measurement of a stocks movement relative to the market, couldn't other historical measuring sticks (technical and fundamental analysis) be useful tools also? It is these inherent contradictions that weaken the Randomaniacs theories.
Should this book be bought? Not in my opinion (although, I bought it...).Even though Malkiel tries, he does not statistically prove the Random Walk theory. In reality, it seems doubtful that statistical evidence will ever prove or disprove Random Walk. But, to invest successfully, one must understand how other investors and traders are thinking. Knowing about Random Walk (not intrinsically believing it) should help you make better investment decisions. However, it is not necessary to plow through the hundreds of pages in this book. So, put your darts away and embark on a less-random investment strategy.
on January 14, 2000
I will not poke fun at Burton Malkiel. I shall not mention the fact that he is an ivory tower academic or anything of the sort. I actually agree with Mr.Malkiel's supposition to a great extent, the markets are random. To an extent. I am simply amazed at how "professionals" consistently manage to underperform the market, it takes real skill to do this. By professionals I mean: mutual fund, hedge fund and CTA managers. Looking at the credentials of many of these fellows makes one think that they would be able to trounce the S&P with minimal effort; however, the only thing being trounced are the over inflated egos residing on Wall Street. Some hedge funds and CTA's employ strategies so complex that only a rocket scientist can decipher them, in fact I am sure a not so small number of rocket scientists have been utilized to come up with more than a few mind numbing "methodologies", all spectacular successes as everyone has figured out by now. The average person should stick with indexing in the form of SPYDERS, this is the best way to replicate the S&P 500 index with the lowest cost structure. The above average person however, has a panoply of choices. Statistical probabilities suggest that there always will be a number of individuals that outperform the market. Sadly, I am afraid that followers of the random-walk theory are looking at the wrong probability. What they should look at instead, is the probability of certain individuals or organizations significantly outperforming the market over a very large period of time. The probability of this occurence is very nearly zero. I can list several people that have produced above average returns in a consistent manner even under the impostion of 25% incentive fees. I should also state that these managers could probably compound at greater rates were it not for most investor's lack of tolerance for downside volatility. Renaissance Technologies has been compounding at over 40% a year with no losing years for the last 10 years and I should also mention that it is a huge huge billion dollar fund. Bill Eckhardt has been compounding at around 30% per annum for the same amount of time. So has Bill Dunn's World Monetary Assets program, another billion dollar juggernaut. George Soros has returned on average, 25% a year for the last 20 years. I can name at least 20 to 30 other investor/traders with significantly above average track records. The point I am trying to make is that capital markets are not entirely random. There will always be outliers, no one can deny this. The fact that these outliers reproduce their results with such an uncanny persistence is another story altogether.
on September 6, 1999
I got this book as a gift and I am very glad that I read it. First to say that it is a pleasure to read this book, it is very very well written, something not commonly found in investment books. As an investor, I take the risk of investing in Internet Stocks (not really recommended in the book, a typical "castle in the air" investment), though I buy for the long run (A Montley Fools Graduate). This book will remind and teach you with good examples that investing involves not only careful examination of companies but also understanding the "emotions" of the market. In the long run, as the book well explains, chances are that the prices will adjust to the "real" value of the companies.
The book explains thoroughly several approaches that have been followed by "professional investors" to beat the market. This is very educative for the personal investor.
This book will not tell you which companies to buy (some suggestions are given to choose them) but will educate you for the long term investment.
on April 23, 1997
Wow! I feel like I'm on Reading Rainbow. Hi, my name is Will, and I want to tell you about a book that I just read. It has really pretty pictures and...
No, seriously, though, if the recent rollercoaster ride the Dow has been taking leaves you wondering just what in the world is going on in the minds of Wall Street's denizens, enlighten yourself and pick up this highly readable book. Malkiel has done an excellent job of covering a wide breadth of important topics, ranging from fundamental analysis to the risk quantifying concept of Beta. He keeps this from becoming another dry book on investment by recounting entertaining tales, like that of a sailor who mistook a tulip for an onion, and used for relish what could instead have been used to buy a house. Fortunately, or unfortunately for the sailor, the bulb was not not his, and he paid for his mistake not with a lifetime of grief, but instead by spending several months in jail. All for the love of a tulip. Find out the fates of others who fell victim to speculative bubbles, and get a rock-solid foundation in investment theory all at the same time. This book has earned itself a place on my shelf next to Peter Lynch's Beating the Street
on July 2, 2000
Concise, thorough, and fair: Malakiel lays out efficient markets theory (the economics of information), and debunks anyone who claims to have a "special edge" on the markets.
Sure, real world markets have frictions. The important question is not "Does the real world differ from the world of the model?" but "Does it differ enough to make a difference?" Malakiel argues that it doesn't differ enough to make a difference.
Some of Malakiel's examples are a bit antiquated, and anyone with a strong math/finance background will feel as if they're sitting in the dunce class during some of Malakiel's explanations. And the very last part of the book, where he gives investment recommendations, seems to contradict the main part of his theory: he claims that some investments (basically, contrarianism) can consistently beat the market! Huh?
Overall, however, this is an extremely valuable, and even enjoyable book.
on February 18, 1999
"Efficient Market Theory", at least to my layman's mind, postulates that stock-picking is ultimately pointless because the market at any given moment is efficiently discounting, or incorporating, all available information about a company's future prospects in its current share price. While the argument may continue over whether this theory is accurate in principle, it seems to me that it is true in practice for small investors, who are at the bottom of the food chain as far as getting information about companies, and who incur heavy commission and tax liabilities if they trade a great deal. So this book helps wisen up small investors a little, at least in my simple opinion. Stick to equity index funds over the long haul, and you'll get the most bang for your buck.