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A Random Walk Down Wall Street: The Time-Tested Strategy for Successful Investing
Today’s stock market is not for the faint of heart. At a time of frightening volatility, what is the average investor to do?
The answer: turn to Burton G. Malkiel’s advice in his reassuring, authoritative, gimmick-free, and perennially best-selling guide to investing. Long established as the first book to purchase before starting a portfolio or 401(k), A Random Walk Down Wall Street now features new material on “tax-loss harvesting,” the crown jewel of tax management; the current bitcoin bubble; and automated investment advisers; as well as a brand-new chapter on factor investing and risk parity. And as always, Malkiel’s core insights—on stocks and bonds, as well as real estate investment trusts, home ownership, and tangible assets like gold and collectibles— along with the book’s classic life-cycle guide to investing, will help restore confidence and composure to anyone seeking a calm route through today’s financial markets.
The answer: turn to Burton G. Malkiel’s advice in his reassuring, authoritative, gimmick-free, and perennially best-selling guide to investing. Long established as the first book to purchase before starting a portfolio or 401(k), A Random Walk Down Wall Street now features new material on “tax-loss harvesting,” the crown jewel of tax management; the current bitcoin bubble; and automated investment advisers; as well as a brand-new chapter on factor investing and risk parity. And as always, Malkiel’s core insights—on stocks and bonds, as well as real estate investment trusts, home ownership, and tangible assets like gold and collectibles— along with the book’s classic life-cycle guide to investing, will help restore confidence and composure to anyone seeking a calm route through today’s financial markets.
432 pages, Hardcover
First published April 1, 1973
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Displaying 1 - 30 of 1,611 reviews
April 15, 2012
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.
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.
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.
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.
February 28, 2023
my dad made me read this.
and i'm not going to retain any of it.
this is fun and readable and way too much and i hated it. if you need to read a book about stocks and investing, this is, i'm sure, the exact best possible option based on both expertise and overall amusement, but i refuse to believe i needed to read a book of that description.
so here we are.
bottom line: the best of my least favorite world!
3.5
and i'm not going to retain any of it.
this is fun and readable and way too much and i hated it. if you need to read a book about stocks and investing, this is, i'm sure, the exact best possible option based on both expertise and overall amusement, but i refuse to believe i needed to read a book of that description.
so here we are.
bottom line: the best of my least favorite world!
3.5
January 20, 2020
English (A Random Walk Down Wall Street) / Italiano
A challenging walk around Wall Street, in different time periods that affected the American economy and consequently the World, in order to provide us the necessary elements to understand the main investment rules applied on the stock exchange. Burton G. Malkiel describes with clear examples the differences between audacious investment strategies, designed to quickly profit, and more prudent strategies that aim to increase profits in longer times.
Recommended for those who want an introduction to the stock market world.
Vote: 7
Una stimolante “passeggiata” per Wall Street, percorrendo varie tappe temporali che hanno segnato l’economia americana in primis, e di riflesso quella mondiale, allo scopo di fornirci gli elementi necessari a comprendere le principali regole di investimento in borsa. Burton G. Malkiel descrive con chiari esempi le differenze tra strategie di investimento spregiudicate, volte a trarre profitto in tempi brevi, e strategie più prudenti che mirano ad incrementare i profitti in tempi più lunghi.
Consigliato a chi vuole un introduzione sul mondo della borsa.
Voto: 7
September 7, 2016
Because I read so often, I sometimes think that once in a while I should read something that might materially benefit me. So when my brother gave me this book, I thought "why not?" and dove in.
The first thing I noticed is that Malkiel is a surprisingly gifted writer. He is capable of telling a good story, he's cultured enough to make interesting references, and he has that quintessential skill of all popular writers: the ability to present ideas clearly without dumbing them down. For someone in my position—who managed to get this far in life while remaining astoundingly ignorant of these matters—I can't imagine a better introduction into the world of finance. Malkiel gives you a little history, a little theory, and a lot of practical advice.
Given that I am, as aforesaid, a neophyte, I cannot give an intelligent appraisal of this book. That being said, Malkiel did manage to be very convincing. He presents anecdotal, theoretical, historical, and statistical reasons to adopt his strategies; indeed, he goes to such pains to prove his point, that it's hard not to agree with him. Of course, any person who trades actively will probably find a lot to disagree with. Particularly contentious is Malkiel's championing of the Efficient-Market Theory (EMT). As my father said to me last night, "That's crazy; the market isn't efficient—it's all mob psychology!"
Malkiel does give mob psychology its due. He devotes an entire chapter to behavioral finance, and covers some of the innumerable foibles of our race when it comes to making rational decisions. In fact, it was Malkiel's effort to give the opposing views their due (minus the analysts, whom he ridicules mercilessly) which made him so convincing for me. For he is not simply an intractable proponent of EMT, heedless of all the contrary evidence.
His position is more subtle: first, he holds that markets, even if they're inefficient in the short run, trend towards efficiency in the long run; second, he points out that, even if a stock might be mispriced, the financial tools available for determining if and to what extent it is mispriced are often inaccurate; and third, he points to the many practical impediments to cashing in on market inefficiencies, such as transaction fees and capital gains taxes.
Of course, I doubt this book is the whole story; after all, I personally know people who made considerable money on the stock market using diametrically opposed strategies. And for a book on something which has frustrated some of the best and brightest minds, Malkiel comes across as astoundingly cocksure. So I cannot say that I am an acolyte. On the other hand, the core of Malkiel's advice—to invest in a diversified index fund, and hold onto it for a long time—strikes me as sensible (especially for someone as financially ignorant as am I). It also has a certain lazy charm. And how often do self-help books give their imprimatur to laziness?
The first thing I noticed is that Malkiel is a surprisingly gifted writer. He is capable of telling a good story, he's cultured enough to make interesting references, and he has that quintessential skill of all popular writers: the ability to present ideas clearly without dumbing them down. For someone in my position—who managed to get this far in life while remaining astoundingly ignorant of these matters—I can't imagine a better introduction into the world of finance. Malkiel gives you a little history, a little theory, and a lot of practical advice.
Given that I am, as aforesaid, a neophyte, I cannot give an intelligent appraisal of this book. That being said, Malkiel did manage to be very convincing. He presents anecdotal, theoretical, historical, and statistical reasons to adopt his strategies; indeed, he goes to such pains to prove his point, that it's hard not to agree with him. Of course, any person who trades actively will probably find a lot to disagree with. Particularly contentious is Malkiel's championing of the Efficient-Market Theory (EMT). As my father said to me last night, "That's crazy; the market isn't efficient—it's all mob psychology!"
Malkiel does give mob psychology its due. He devotes an entire chapter to behavioral finance, and covers some of the innumerable foibles of our race when it comes to making rational decisions. In fact, it was Malkiel's effort to give the opposing views their due (minus the analysts, whom he ridicules mercilessly) which made him so convincing for me. For he is not simply an intractable proponent of EMT, heedless of all the contrary evidence.
His position is more subtle: first, he holds that markets, even if they're inefficient in the short run, trend towards efficiency in the long run; second, he points out that, even if a stock might be mispriced, the financial tools available for determining if and to what extent it is mispriced are often inaccurate; and third, he points to the many practical impediments to cashing in on market inefficiencies, such as transaction fees and capital gains taxes.
Of course, I doubt this book is the whole story; after all, I personally know people who made considerable money on the stock market using diametrically opposed strategies. And for a book on something which has frustrated some of the best and brightest minds, Malkiel comes across as astoundingly cocksure. So I cannot say that I am an acolyte. On the other hand, the core of Malkiel's advice—to invest in a diversified index fund, and hold onto it for a long time—strikes me as sensible (especially for someone as financially ignorant as am I). It also has a certain lazy charm. And how often do self-help books give their imprimatur to laziness?
January 21, 2008
From talking to friends and reading an internal financial mailing list at work I got the vague impression that this book was somehow too esoteric or controversial to bother with. I am very glad that I decided to read this book.
It's hard to work in Silicon Valley without being affected by Wall Street. When I started working I was interested in technology, not business and finance. Business and finance seemed a bit beneath me. (Actually, technology seemed a bit beneath me too. I was kind of a snot in my twenties. But learning technology was directly related to my income, which forced me to pay enough attention to it to become interested.)
Eventually I got to a point where I had to deal with stock options, employee stock purchase programs, lock out periods, etc. My approach to learning about this was similar to my approach to learning about technology: trial and error. Sadly this was an expensive way to learn. (One example: It cost me about $30,000 to learn the different between a market order and a limit order when selling some VRTY shares.) I have learned some definite lessons about how the stock market works, but at the cost of more money than I thought I would ever have -- let alone lose.
That's why I would recommend this book to anyone who is planning to retire one day (i.e. everyone), especially people in their twenties with a vaguely technical bent. There is enough math and logic to make it interesting combined with enough plain prose and logical advice to make it important reading.
If you aren't going to read it, I will summarize it here: save early and regularly, put the savings in index funds, try not to die. You can safely take out 4.5% of principal, so work backwards from that to figure out how and when to retire.
It's hard to work in Silicon Valley without being affected by Wall Street. When I started working I was interested in technology, not business and finance. Business and finance seemed a bit beneath me. (Actually, technology seemed a bit beneath me too. I was kind of a snot in my twenties. But learning technology was directly related to my income, which forced me to pay enough attention to it to become interested.)
Eventually I got to a point where I had to deal with stock options, employee stock purchase programs, lock out periods, etc. My approach to learning about this was similar to my approach to learning about technology: trial and error. Sadly this was an expensive way to learn. (One example: It cost me about $30,000 to learn the different between a market order and a limit order when selling some VRTY shares.) I have learned some definite lessons about how the stock market works, but at the cost of more money than I thought I would ever have -- let alone lose.
That's why I would recommend this book to anyone who is planning to retire one day (i.e. everyone), especially people in their twenties with a vaguely technical bent. There is enough math and logic to make it interesting combined with enough plain prose and logical advice to make it important reading.
If you aren't going to read it, I will summarize it here: save early and regularly, put the savings in index funds, try not to die. You can safely take out 4.5% of principal, so work backwards from that to figure out how and when to retire.
June 13, 2011
Investors are bound to have heard about this classic and it’s author, economist Burton Malkiel. In this book, he explains that the market is highly efficient, and no one can accurately predict its ups and downs; it’s a “random walk”. So, the best approach is passive, “buy and hold” investing using diversified index funds held long term. I recommend this book to investors of any level, especially those attracted to active, speculative investing.
The book begins with a fairly boring recount of several financial bubbles throughout history, to prove the “irrational exuberance” of investors. Malkiel shows that despite short-term trends, the market always corrects itself; “value will out”, as he puts it. Crazed investors rush into “revolutionary” new companies and technologies, but the key to investing is not how much an industry will affect society or how fast it will grow, but its ability to sustain profits. In truth, most IPOs underperform.
Several investing techniques and theories are evaluated, including technical analysis, fundamental analysis, firm foundation theory, the “castle in the air” theory, efficient market theory, and modern portfolio theory. Malkiel uses the efficient market theory to explain the markets’ efficiencies, and modern portfolio theory in advising how to construct a diversified portfolio.
Malkiel makes a compelling case that active investing is a losing game. Active investors generally underperform passive investors because they fail to time their purchases and sales correctly, and they incur transaction fees and taxes on their short term gains. Only 1/3 of active investors (individual traders and fund managers) beat the S&P 500 in the short term, and almost none beat it over the long term. In this section and throughout the book, Malkiel often refers to John Bogle, champion of indexing and founder of the Vanguard Group. I’m something of a Bogle disciple, and highly recommend his book The Little Book of Common Sense Investing.
After providing a lot of background information, Malkiel finally gets to the part I was looking for: specific financial advice. He explains asset allocation and diversification, and how to build a portfolio based on your age and risk tolerance. I was hoping for example portfolios showing asset allocations for various age ranges, but Malkiel shies away from such detailed recommendations. For people in their 20s, like me, he suggests investing aggressively in stocks, including international and emerging markets. See my notes below for more of his advice.
One of the main themes is the relationship between risk and reward. Malkiel puts it this way: you must decide whether you’d rather eat well or sleep well. Higher risk is more likely to yield higher returns, allowing you to eat well, but the stress may cost you your sleep. Only you know the risk you’re willing to take for the potential reward.
The book ends with an explanation of hedging with derivatives such as futures, put options, and call options. I didn’t pay much attention, and plan to stick with his simpler advice on diversified indexing.
Notes
Ignore short term volatility; buy and hold for the long term.
It’s financially wise to own your home. It’s an inflation hedge, provides tax breaks, and forces saving.
The market trends upward, so it’s better to invest a lump sum today than to dollar cost average. For investors without lump sums, however, dollar cost averaging is the most common and reasonable approach.
Save for financial goals using vehicles that mature at the goal date (CDs, treasuries, bonds, etc.).
Portfolio construction
Diversify to reduce risk. Choose assets with low or no correlation. Include US stocks, international stocks, emerging market stocks, REITs, bonds, TIPs, and cash.
Hold bonds and bond funds in tax sheltered accounts.
Small cap stocks tend to outperform large cap. This may be due to higher risk, or survivorship bias.
Value stocks tend to outperform growth, because investors tend to overpay for growth.
REITs add diversity and have returns similar to stocks. They also provide an inflation hedge.
Selecting funds
Choose no load, total stock market index funds.
If you buy active funds, choose no load, low turnover, low expense funds with little unrealized appreciation.
Look for expense ratios less than 0.5% and turnover less than 50%.
The book begins with a fairly boring recount of several financial bubbles throughout history, to prove the “irrational exuberance” of investors. Malkiel shows that despite short-term trends, the market always corrects itself; “value will out”, as he puts it. Crazed investors rush into “revolutionary” new companies and technologies, but the key to investing is not how much an industry will affect society or how fast it will grow, but its ability to sustain profits. In truth, most IPOs underperform.
Several investing techniques and theories are evaluated, including technical analysis, fundamental analysis, firm foundation theory, the “castle in the air” theory, efficient market theory, and modern portfolio theory. Malkiel uses the efficient market theory to explain the markets’ efficiencies, and modern portfolio theory in advising how to construct a diversified portfolio.
Malkiel makes a compelling case that active investing is a losing game. Active investors generally underperform passive investors because they fail to time their purchases and sales correctly, and they incur transaction fees and taxes on their short term gains. Only 1/3 of active investors (individual traders and fund managers) beat the S&P 500 in the short term, and almost none beat it over the long term. In this section and throughout the book, Malkiel often refers to John Bogle, champion of indexing and founder of the Vanguard Group. I’m something of a Bogle disciple, and highly recommend his book The Little Book of Common Sense Investing.
After providing a lot of background information, Malkiel finally gets to the part I was looking for: specific financial advice. He explains asset allocation and diversification, and how to build a portfolio based on your age and risk tolerance. I was hoping for example portfolios showing asset allocations for various age ranges, but Malkiel shies away from such detailed recommendations. For people in their 20s, like me, he suggests investing aggressively in stocks, including international and emerging markets. See my notes below for more of his advice.
One of the main themes is the relationship between risk and reward. Malkiel puts it this way: you must decide whether you’d rather eat well or sleep well. Higher risk is more likely to yield higher returns, allowing you to eat well, but the stress may cost you your sleep. Only you know the risk you’re willing to take for the potential reward.
The book ends with an explanation of hedging with derivatives such as futures, put options, and call options. I didn’t pay much attention, and plan to stick with his simpler advice on diversified indexing.
Notes
Ignore short term volatility; buy and hold for the long term.
It’s financially wise to own your home. It’s an inflation hedge, provides tax breaks, and forces saving.
The market trends upward, so it’s better to invest a lump sum today than to dollar cost average. For investors without lump sums, however, dollar cost averaging is the most common and reasonable approach.
Save for financial goals using vehicles that mature at the goal date (CDs, treasuries, bonds, etc.).
Portfolio construction
Diversify to reduce risk. Choose assets with low or no correlation. Include US stocks, international stocks, emerging market stocks, REITs, bonds, TIPs, and cash.
Hold bonds and bond funds in tax sheltered accounts.
Small cap stocks tend to outperform large cap. This may be due to higher risk, or survivorship bias.
Value stocks tend to outperform growth, because investors tend to overpay for growth.
REITs add diversity and have returns similar to stocks. They also provide an inflation hedge.
Selecting funds
Choose no load, total stock market index funds.
If you buy active funds, choose no load, low turnover, low expense funds with little unrealized appreciation.
Look for expense ratios less than 0.5% and turnover less than 50%.
November 10, 2016
We live in an age when most people have to control their own retirement destiny by making decisions about 401(k), 403(b), and IRAs. Even people with the most modest incomes are encouraged to confront that reality.
Malkiel’s approach is excellent for most of us who are not into stock analysis. He gets high marks for a couple of things: (1) He proposed a market index fund before such a thing even existed. (2) He has revised his book eleven times. In other words he has some street cred. Wall Street cred. I read this because Jack Bogle (of Vanguard fame) recommends it as the best book to read on the subject of investment. And the real point of reading it – I wanted to see what Malkiel’s update had to say about my retirement funds in the current economic environment.
At times I wondered who Malkiel was directing the book at. Some of his advice is remarkably simplistic, the kind of advice only a newbie would need. (Buy a house. Keep cash in an emergency fund.) But then section three is wonky, and he could not resist digging into the research that informs his decisions. For two-thirds of the book, I found this dichotomy annoying. Economists may like section three, but they won’t much care about section four, when the hand-holding begins.
You may or may not care about the arguments over “efficient markets.” Malkiel is generally a believer but acknowledges dissenting views. Read it or not. If you’re here because you are looking for a rationale for a portfolio – one you can manage yourself – hang in there and read on.
Essentially, his advice is classic for our times: build a diversified portfolio of index funds (some small caps, large caps, international, emerging economies, REITs, and bonds). If possible, start early and keep as much as you can in tax-sheltered accounts. He does not recommend buying a stock index fund and nothing else. The comments on diversifying are important.
Not a radical approach. He does feel that in the middle of this decade we live in an environment that is not likely to offer large returns. So his asset allocation recommendations are the meat of his 2015 advice. Many readers may want to zoom right in on those later chapters. He has comments on the amount of risk appropriate to various situations.
You won’t get rich quick following his advice, but you probably knew that. But you’ll probably face retirement with a tidy sum and a stable financial life.
Malkiel’s approach is excellent for most of us who are not into stock analysis. He gets high marks for a couple of things: (1) He proposed a market index fund before such a thing even existed. (2) He has revised his book eleven times. In other words he has some street cred. Wall Street cred. I read this because Jack Bogle (of Vanguard fame) recommends it as the best book to read on the subject of investment. And the real point of reading it – I wanted to see what Malkiel’s update had to say about my retirement funds in the current economic environment.
At times I wondered who Malkiel was directing the book at. Some of his advice is remarkably simplistic, the kind of advice only a newbie would need. (Buy a house. Keep cash in an emergency fund.) But then section three is wonky, and he could not resist digging into the research that informs his decisions. For two-thirds of the book, I found this dichotomy annoying. Economists may like section three, but they won’t much care about section four, when the hand-holding begins.
You may or may not care about the arguments over “efficient markets.” Malkiel is generally a believer but acknowledges dissenting views. Read it or not. If you’re here because you are looking for a rationale for a portfolio – one you can manage yourself – hang in there and read on.
Essentially, his advice is classic for our times: build a diversified portfolio of index funds (some small caps, large caps, international, emerging economies, REITs, and bonds). If possible, start early and keep as much as you can in tax-sheltered accounts. He does not recommend buying a stock index fund and nothing else. The comments on diversifying are important.
Not a radical approach. He does feel that in the middle of this decade we live in an environment that is not likely to offer large returns. So his asset allocation recommendations are the meat of his 2015 advice. Many readers may want to zoom right in on those later chapters. He has comments on the amount of risk appropriate to various situations.
You won’t get rich quick following his advice, but you probably knew that. But you’ll probably face retirement with a tidy sum and a stable financial life.
June 12, 2022
Why didn't I read this earlier? Essential reading.
If you're a personal finance novice like me, skip all the noisy books and influencers on investing and just read this. It has a higher signal-to-noise ratio because Malkiel knows his stuff. He doesn't overcomplicate things, but the substance is there. And this book is, miraculously, fun to read because of his sense of humor.
One thing to note -- while Malkiel doesn't overcomplicate things, there are both simple takeaways and nuanced ones. Chapters will sometimes start with a theory and some evidence to support it, then more evidence to refute it. If that's not your cup of tea, then maybe seek out a simpler text with the same overarching conclusion. But reality is not simple, and although I'm a novice, I like learning things at a slightly deeper level, getting a glimpse of the caveats and complexities -- if only because it shores up my confidence in the simple takeaways of the book (roughly "don't try to beat the market, except for fun/with lower stakes, and even then, don't expect to win but here are some strategies that could help, YMMV"). I can't say I was always able to reconcile or make sense of the detailed evidence presented, but the simple takeaways were always very clear and I feel more confident in my investments now.
He's pretty old now so I'm not sure if he'll publish another edition, but I'd have loved to read a version of this published after 2021 - I'm sure he has a view on the extraordinary market circumstances over the past two years.
If you're a personal finance novice like me, skip all the noisy books and influencers on investing and just read this. It has a higher signal-to-noise ratio because Malkiel knows his stuff. He doesn't overcomplicate things, but the substance is there. And this book is, miraculously, fun to read because of his sense of humor.
One thing to note -- while Malkiel doesn't overcomplicate things, there are both simple takeaways and nuanced ones. Chapters will sometimes start with a theory and some evidence to support it, then more evidence to refute it. If that's not your cup of tea, then maybe seek out a simpler text with the same overarching conclusion. But reality is not simple, and although I'm a novice, I like learning things at a slightly deeper level, getting a glimpse of the caveats and complexities -- if only because it shores up my confidence in the simple takeaways of the book (roughly "don't try to beat the market, except for fun/with lower stakes, and even then, don't expect to win but here are some strategies that could help, YMMV"). I can't say I was always able to reconcile or make sense of the detailed evidence presented, but the simple takeaways were always very clear and I feel more confident in my investments now.
He's pretty old now so I'm not sure if he'll publish another edition, but I'd have loved to read a version of this published after 2021 - I'm sure he has a view on the extraordinary market circumstances over the past two years.
August 28, 2020
Read in case I ever get an interview for a job in finance. How do I post goodreads updates on my LinkedIn?
December 4, 2014
Great theories to learn!I can see why this became a classic for investors.
-The Firm-Foundation Theory(Fundamental Analysis)
-The Castle-in-the-Air Theory (Technical Analysis)
-The Firm-Foundation Theory(Fundamental Analysis)
-The Castle-in-the-Air Theory (Technical Analysis)
December 23, 2020
Conclusion : Index funds are underrated.
September 18, 2014
This is probably the best book ever written on the investment side of personal finances. It goes into extensive detail as to why you should strongly consider index funds or ETFs rather than mutual funds, individual stocks, or help from a personal financial adviser. All 3 of these last alternatives come with a load in terms of either your time or money (or both).
First, Mutual funds are managed and rarely outperform the market. For this lack of performance, you get to give away a percentage each year for the management fees. Note that these fees apply whether the mutual fund goes up or down.
Second, individual stocks are hard to pick without investing a serious amount of time. I also find that EVERYONE (myself included) only track the stocks where they did well. We all have a collective mental block that prevents us from remembering the stinkers that lost money for us. When you add the wins and losses together, I've never been able to beat the market. Note that whenever I've bothered to press someone who tells me they have, it turns out they haven't...again, it's that darn mental block thing.
Third, and worst of all, you could go with a personal financial adviser. As a group, they woefully under perform vis-a-vis the market. They charge you for this failure. Note that if you have done zero reading on investing, they can give you guidance on things like balancing asset classes, but you can figure this out for yourself in about two hours.
The only potentially negative thing I would say about this book is that it is very long. It goes into detailed explanations to get to the punchline regarding index funds and ETFs. I love this kind of detail, because I've always been fascinated by investing. However, if this is a dry topic for you, you should consider reading "The Smartest Investment Book You'll Ever Read." It is very short and doesn't support its central premise as well as "A Random Walk...". However, it gets to the same conclusion faster.
Happy investing!
First, Mutual funds are managed and rarely outperform the market. For this lack of performance, you get to give away a percentage each year for the management fees. Note that these fees apply whether the mutual fund goes up or down.
Second, individual stocks are hard to pick without investing a serious amount of time. I also find that EVERYONE (myself included) only track the stocks where they did well. We all have a collective mental block that prevents us from remembering the stinkers that lost money for us. When you add the wins and losses together, I've never been able to beat the market. Note that whenever I've bothered to press someone who tells me they have, it turns out they haven't...again, it's that darn mental block thing.
Third, and worst of all, you could go with a personal financial adviser. As a group, they woefully under perform vis-a-vis the market. They charge you for this failure. Note that if you have done zero reading on investing, they can give you guidance on things like balancing asset classes, but you can figure this out for yourself in about two hours.
The only potentially negative thing I would say about this book is that it is very long. It goes into detailed explanations to get to the punchline regarding index funds and ETFs. I love this kind of detail, because I've always been fascinated by investing. However, if this is a dry topic for you, you should consider reading "The Smartest Investment Book You'll Ever Read." It is very short and doesn't support its central premise as well as "A Random Walk...". However, it gets to the same conclusion faster.
Happy investing!
July 26, 2021
tldr; Modern financial markets are highly efficient and (even with the right combination of genius, timing, capital, and luck) it's highly unlikely you'll consistently outsmart the market average. Instead, you should passively invest in a broadly diversified portfolio with index funds at its core. Contribute regularly to these investments to average out volatility (dollar-cost averaging). Over time, this strategy produces the highest returns. The earlier you start, the more that growth compounds. Select funds with the lowest fees and defer paying tax by keeping your money invested. Risk and long-term returns are inextricably linked. Start with a higher-risk portfolio when you are young and gradually reduce the risk of the portfolio as you age, by shifting to asset classes with lower volatility.
If you're going to read just one book on investing or finance, this should probable be it. A Random Walk Down Wall Street strikes a great balance between building concepts and extracting useful heuristics.
What follow are my takeaway lessons:
Currency inflation decreases your purchasing power over time. When factoring in taxes, the interest on savings accounts is often not enough to outpace this inflation. Instead, investing in assets like stocks, bonds, and property allow you to grow your money by taking on additional risk. In this book, Malkiel outlines the various ways this can be achieved and how they compare, both in theoretical analysis and through the lens of history.
The two theories at the core of investing are:
(1) "the firm foundation theory," in which investors assess the intrinsic value of businesses and search for those that are undervalued by having deeper insights and better information than the rest of the market. This is the basis of the fundamental analysis used by the likes of Warren Buffet.
(2) "the castle in the sky theory," where investors try play the psychology game one level above the naïve and exploit their reactive trends. This is where the much-maligned "technical analysis" comes in — advocates attempt to spot patterns in the pricing histories of assets and exploit short-term price changes.
Malkiel presents a number of arguments why both (1) and (2) are losing strategies for the vast majority of investors. He then presents the core theme of the book: modern portfolio theory — where investments are diversified across (uncorrelated) assets in an attempt to maximise returns for a given risk level. Malkiel maintains that passively investing in low-cost index funds over decades is the only reliable strategy for long-term growth. He notes that most mutual/hedge funds don't add much value for their fee and generally underperform compared to the market average.
Over the various editions of this book, Malkiel hasn't wavered in his core advice, but did add a number of additional notes to address recent anomalies like the 2008 market crash and the advent of cryptocurrencies.
In the final chapter he reconciles his index-centric advice with Efficient Market Theory: EMT works because some active investors keep the market efficient and allow the passive (index) investors to enjoy consistent long-term growth. I interpret this to mean something along the lines of the minority who chase alpha enable the majority to achieve beta.
For a detailed summary of all the major principles in the book, see here. It's about a 15-minute read.
If you're going to read just one book on investing or finance, this should probable be it. A Random Walk Down Wall Street strikes a great balance between building concepts and extracting useful heuristics.
What follow are my takeaway lessons:
Currency inflation decreases your purchasing power over time. When factoring in taxes, the interest on savings accounts is often not enough to outpace this inflation. Instead, investing in assets like stocks, bonds, and property allow you to grow your money by taking on additional risk. In this book, Malkiel outlines the various ways this can be achieved and how they compare, both in theoretical analysis and through the lens of history.
The two theories at the core of investing are:
(1) "the firm foundation theory," in which investors assess the intrinsic value of businesses and search for those that are undervalued by having deeper insights and better information than the rest of the market. This is the basis of the fundamental analysis used by the likes of Warren Buffet.
(2) "the castle in the sky theory," where investors try play the psychology game one level above the naïve and exploit their reactive trends. This is where the much-maligned "technical analysis" comes in — advocates attempt to spot patterns in the pricing histories of assets and exploit short-term price changes.
Malkiel presents a number of arguments why both (1) and (2) are losing strategies for the vast majority of investors. He then presents the core theme of the book: modern portfolio theory — where investments are diversified across (uncorrelated) assets in an attempt to maximise returns for a given risk level. Malkiel maintains that passively investing in low-cost index funds over decades is the only reliable strategy for long-term growth. He notes that most mutual/hedge funds don't add much value for their fee and generally underperform compared to the market average.
Over the various editions of this book, Malkiel hasn't wavered in his core advice, but did add a number of additional notes to address recent anomalies like the 2008 market crash and the advent of cryptocurrencies.
In the final chapter he reconciles his index-centric advice with Efficient Market Theory: EMT works because some active investors keep the market efficient and allow the passive (index) investors to enjoy consistent long-term growth. I interpret this to mean something along the lines of the minority who chase alpha enable the majority to achieve beta.
For a detailed summary of all the major principles in the book, see here. It's about a 15-minute read.
April 2, 2009
Malkiel's been writing and rewriting this classic tome on investing for the last thirty-five years. I gave him 5 stars for being fully engaged in the process of revision. Sometimes I wish all authors would write (and rewrite) just one good book (and that actors would star in only one movie). But that's like asking investors to put their money in just a few low-cost funds and hold it there for decades ... hey, that's what Malkiel's talking about! So it's not the most exciting approach to investing; but it will, in the long run, turn out to be the most rewarding.
This newly rewritten version of Malkiel's classic Random Walk ... (first published in 1973 but essentially rewritten at least four or five times since) argues that the best way to make money on Wall Street is to build a diversified portfolio of index funds (some small caps, large caps, emerging economies, REITs, and bonds) and hold on to them for a long, long time in a tax advantaged account. He advises you how to adjust your asset allocation according to your age or point in life, and he even allows you to pick a few stocks for minor investments just for fun and to help you stay interested in the market.
Preliminary chapters recount bubbles past (where would historical economics be without 17th-century Holland's fascination with tulips?). The middle sections debunk dubious investment strategies based in everything from hemlines to super bowls and stresses the importance of sheer, random luck in choosing profitable stocks. Part Three looks at modern investment theories (if you don't have a background in economics, you might want to skim some of this part). The final section details Malkiel's guide to personal finance and investing.
If you are curious about how men and women have invested their money over the past 500 years, or how common investment strategies work (and don't work in the long run), or how to make the most of your investments over decades, Malkiel's Random Walk ... will prove to be an engaging, even entertaining read that like most classics can hold up to many re-readings. You certainly won't get rich quick following Malkiel's advice, but you probably will find yourself in a fairly stable financial state in twenty or thirty years.
This newly rewritten version of Malkiel's classic Random Walk ... (first published in 1973 but essentially rewritten at least four or five times since) argues that the best way to make money on Wall Street is to build a diversified portfolio of index funds (some small caps, large caps, emerging economies, REITs, and bonds) and hold on to them for a long, long time in a tax advantaged account. He advises you how to adjust your asset allocation according to your age or point in life, and he even allows you to pick a few stocks for minor investments just for fun and to help you stay interested in the market.
Preliminary chapters recount bubbles past (where would historical economics be without 17th-century Holland's fascination with tulips?). The middle sections debunk dubious investment strategies based in everything from hemlines to super bowls and stresses the importance of sheer, random luck in choosing profitable stocks. Part Three looks at modern investment theories (if you don't have a background in economics, you might want to skim some of this part). The final section details Malkiel's guide to personal finance and investing.
If you are curious about how men and women have invested their money over the past 500 years, or how common investment strategies work (and don't work in the long run), or how to make the most of your investments over decades, Malkiel's Random Walk ... will prove to be an engaging, even entertaining read that like most classics can hold up to many re-readings. You certainly won't get rich quick following Malkiel's advice, but you probably will find yourself in a fairly stable financial state in twenty or thirty years.
January 28, 2016
A pretty good read for what it's worth. A good primer into basic finance. Personally, it was a good review of finance 101, with a pretty solid explanation of modern portfolio theory, and CAPM. Book seems timely, updated to include a large section on speculative bubbles, and even includes a chapter on behavioral economics. Includes a brief section on the 2008 financial crisis (kind of the standard narrative). It discusses the two competing views of stock prices, which is basically the fundamentalist discount model and technicalist beauty contest.
Surprisingly, the review of the literature was quite broad, going from historical economists debating over tulip mania to Fama's work on beta (that beta against the S&P 500 is predictive of returns). Personally, I thought the most interesting thing was the discussion of Fama-French factors (beta, small firms, value) and the idea of seeing P/E ratios as a certain premium.
The book is famous for introducing efficient market theory (strong, semi-strong and weak forms) to the general public. It argues through some pretty copious evidence that it is hard to beat the market consistently either through fundamentals or technicals. Malkiel shows how the market has outperformed in the long run even professionals, and so advises buying and holding a broadly diversified index as the main component of a portfolio. The book argues that the fees taken by active managers, along with transaction costs and taxes wipe out any extra return if there is any.
Filled with practical advice (life cycle investing, holding more bonds to stocks as you get older), and the standard lessons of finance. A quick and easy read, recommended for beginners or to refresh one's memory.
Surprisingly, the review of the literature was quite broad, going from historical economists debating over tulip mania to Fama's work on beta (that beta against the S&P 500 is predictive of returns). Personally, I thought the most interesting thing was the discussion of Fama-French factors (beta, small firms, value) and the idea of seeing P/E ratios as a certain premium.
The book is famous for introducing efficient market theory (strong, semi-strong and weak forms) to the general public. It argues through some pretty copious evidence that it is hard to beat the market consistently either through fundamentals or technicals. Malkiel shows how the market has outperformed in the long run even professionals, and so advises buying and holding a broadly diversified index as the main component of a portfolio. The book argues that the fees taken by active managers, along with transaction costs and taxes wipe out any extra return if there is any.
Filled with practical advice (life cycle investing, holding more bonds to stocks as you get older), and the standard lessons of finance. A quick and easy read, recommended for beginners or to refresh one's memory.
May 14, 2018
Very tedious.
Annoyingly pretentious.
Absurdly uncalled for.
Just when the books starts to have something going for it, it immediately back pedals & delves into another story from history. And although I normally enjoy these stories for the wisdom they have, the writer is extremely talented in removing anything resembling interest in his tales.
I could swear I had previously read half a dozen of those stories in other books or articles & they sounded very intriguing when I read them there, but in this book, these stories just made me want to end my life.
And it shows how academic this writer is by how much his information contradicts itself. I mean I understand the need for showing all points of view, but dedicating a full chapter for every point of view, then a full chapter to explaining how they are wrong, then repeating this to infinity is just infuriating. Especially when each point of view is preceded by an abundance of introduction that makes you think "wow, this is the one, this is the theory that will break the market" but no, just another false alarm.
Annoyingly pretentious.
Absurdly uncalled for.
Just when the books starts to have something going for it, it immediately back pedals & delves into another story from history. And although I normally enjoy these stories for the wisdom they have, the writer is extremely talented in removing anything resembling interest in his tales.
I could swear I had previously read half a dozen of those stories in other books or articles & they sounded very intriguing when I read them there, but in this book, these stories just made me want to end my life.
And it shows how academic this writer is by how much his information contradicts itself. I mean I understand the need for showing all points of view, but dedicating a full chapter for every point of view, then a full chapter to explaining how they are wrong, then repeating this to infinity is just infuriating. Especially when each point of view is preceded by an abundance of introduction that makes you think "wow, this is the one, this is the theory that will break the market" but no, just another false alarm.
May 30, 2019
An absolutely amazing book going through the essentials of investing and the financial market. There is so much useful information digested for the common folk which I have been looking for in various other titles without success. The author occasionally exaggerates and gives extreme examples to put emphasis on his points which can be a bit annoying at times. I also regret reading a quite old version of the book which has been published right before the economic crisis of 2008. I would say its a must read for anyone interested in investing and would especially recommend it to beginners like myself.
July 8, 2020
This is a gem of a book. I can whole heartedly recommend this to anyone thinking of venturing into financial markets. It assumes very little and gives a brief glimpse of how financial markets work.
You won’t turn into an overnight millionaire by reading this, but the advise here is pretty sound for growing your pot over time.
It ventures into the history of how people have played the game, fundamental analysis, technical analysis and modern portfolio theory.
You might be tempted to skip to the end, where the author talks about what an average investor should do, but I would strongly fight that urge.
I read every single page of this book, annotating and bookmarking sections that I found interesting. I found it to be an extremely rewarding read.
You won’t turn into an overnight millionaire by reading this, but the advise here is pretty sound for growing your pot over time.
It ventures into the history of how people have played the game, fundamental analysis, technical analysis and modern portfolio theory.
You might be tempted to skip to the end, where the author talks about what an average investor should do, but I would strongly fight that urge.
I read every single page of this book, annotating and bookmarking sections that I found interesting. I found it to be an extremely rewarding read.
January 3, 2012
Malkiel's book is just a repackaged version of the same garbage investment firms have fed to the public for years. If the last decade-plus has proved anything, it's that one cannot expect to succeed as an investor by placing your investments on auto-pilot. Following Malkiel's strategy of buying and holding index funds (and not reacting to market conditions), an investor would have reaped negative returns when inflation is factored in.
I've read more than a few books on investing and trading. Malkiel's theory is just that. Real world success in the markets requires diligence, discipline, and study that most investors either can't or won't put in. Investment houses encourage this type of behavior because it works in their favor - they make money whether investors win or lose.
There is no automatic path to stock market riches. Readers should read Malkiel's book with this fact in mind and gird themselves to actively manage their holdings.
I've read more than a few books on investing and trading. Malkiel's theory is just that. Real world success in the markets requires diligence, discipline, and study that most investors either can't or won't put in. Investment houses encourage this type of behavior because it works in their favor - they make money whether investors win or lose.
There is no automatic path to stock market riches. Readers should read Malkiel's book with this fact in mind and gird themselves to actively manage their holdings.
April 27, 2016
It is one of the book that gave the most influence in my life.
I apply that approach the (index funds) to the Nikkei Stock Average and the Dow Jones industrial average stock price.
I have already read the book several times by overlapping edition.
I carry out the index funds .
Periodically I buy it
Practice is important!!!!!!!!!!!!!!!!!!!
---------- it probability distribution manner to distribute the investment in each month
This is the right decision.
the book is worthy of reading repeat and then You must carry out the finance of index fund.
This book is an index fund
This is the Bible of investment
I buy the Nikkei Stock Average and the Dow Jones industrial average stock price by applying this document
Dollar cost method is the basic investment
Monthly distribution method to disperse the risk
It uses a probability distribution
I apply that approach the (index funds) to the Nikkei Stock Average and the Dow Jones industrial average stock price.
I have already read the book several times by overlapping edition.
I carry out the index funds .
Periodically I buy it
Practice is important!!!!!!!!!!!!!!!!!!!
---------- it probability distribution manner to distribute the investment in each month
This is the right decision.
the book is worthy of reading repeat and then You must carry out the finance of index fund.
This book is an index fund
This is the Bible of investment
I buy the Nikkei Stock Average and the Dow Jones industrial average stock price by applying this document
Dollar cost method is the basic investment
Monthly distribution method to disperse the risk
It uses a probability distribution
January 8, 2018
Thank you, Burton, for writing this masterpiece. I always have fear of reading this book because I thought it would be a tough one to read but now I am saying that this book is easy reading with much fun and I am very appreciated for Malkiel's great style of writing.
Great lifetime investing advice, fabulous wisdom and a complete book for Americans but As an Iranian person, I am saying It helped me to think sharp and by every piece of my heart I am saying that I am owing you, Burton G. Malkiel :)
Great lifetime investing advice, fabulous wisdom and a complete book for Americans but As an Iranian person, I am saying It helped me to think sharp and by every piece of my heart I am saying that I am owing you, Burton G. Malkiel :)
November 12, 2020
Moved to gwern.net.
September 26, 2021
thank god it's finally over...
yay another book i'll have to read cover to cover for school...
yay another book i'll have to read cover to cover for school...
September 30, 2021
Recommended, packed with informative insights.
April 19, 2009
Burton Malkiel's "A Random Walk Down Wall Street" is the book that popularized passive investing. As a Princeton professor and board member of the Vanguard Group, Malkiel brought the practical implications of the efficient market hypothesis to the general investing public. The ideas in this book are now so ubiquitously accepted, that I actually learned very little new information. However, I am pleased to have experienced the original source of this powerfully simple yet effective investment philosophy. To be clear, many academics, most notably Eugene Fama, contributed to the intellectual framework by providing the theory, data, and studies. John Bogle allowed the masses to take advantage of this theory by creating the Vanguard Group. Malkiel popularized the idea with this book.
The efficient market hypothesis states that the stock market accurately reflects all available information in current prices such that no individual investor can consistently earn extraordinary returns. If there were such a gauranteed method, other smart investors chasing similar profits would soon make the endeavor unprofitable. In fact, Malkiel and others say that price movements are random or without discernible pattern. The randomness comes in the form of new information, which, by definition, is random. A product's success or failure, an airliner crashing, the result of a court case, and countless other factors that impact companies constitute the news. However, this news is never perfectly foreseeable, and predictions are already factored into the price of the stock. For example, when ConocoPhillips wrote off over $30 billion in goodwill during the 4th quarter of 2008, the stock price did not tumble greatly. The news had already been incorporated.
This idea is proven most easily by the fact that 80% of fund managers fail to beat the market (usually an index fund they use as a target). This is because actively managed funds charge high fees and generate many more trades which must be taxed. Additionally, the 20% who do beat the market in any given year fail to reliably do so the following years. Therefore, it makes sense to mimic the market as cheaply as possible to ensure the highest possible return. Again, this does not mean that people can consistently earn abnormal rates of return. Even recognizing a bubble during the bubble (a difficult task in itself) does not ensure success. Shorting a stock too early or a tulip in Holland could prove disasterous if the bubble continues to expand. Also, recognizing consistent patterns such as the January effect does not mean they can be profitably exploited. Transaction costs often prevent exploiting differences from being worthwhile.
An interesting aspect not addressed by Malkiel in this edition is the ever decreasing cost of buying and selling securities. Zecco.com now allows free trade if you meet certain requirements. My theory is that as transaction costs diminish, so will the perceived "inefficiencies".
Interesting tidbits:
The Indian who sold Manhattan Island for $24 in 1626 would have more than $50 billion if he invested it at 6% interest compounded semiannually.
Neither technical analysis (following past stock prices through charts) nor fundamental analysis (predicting future earnings based on assumptions and guesses) have proven to consistently beat the market. Malkiel still prefers fundamental analysis to the chartists who ignore ALL information about the stock other than the past prices.
Diversification ceases to add additional benefits after 20 stocks or so; a portfolio of 20 stocks is as no more or less risky than a portfolio of 1000 stocks. These benefits come in the form of lower risk or volatility and more consistent returns. Index funds are generally well diversified, which is yet another reason to buy them. Diversification is the meat behind Modern Portfolio Theory, invented in the 1950s by Harry Markowitz of the University of Chicago who won the Nobel Price in Economics for his work. Diversification can be achieved through asset classes (real estate vs stocks vs bonds), company size (small, mid, and large cap), geography (U.S. vs Europe vs Asia), and other ways.
Bond investors got hammered from 1969 through 1981 because of an 8% rate of inflation, which was higher than their returns on the bonds. Additionally, despite real negative rates of return (loss of purchasing power) the bond holders had to pay regular income tax rates on their coupons. They were literally paying money on top of subsidizing the borrowers--a double whammy. Government inflationary and tax policy harmed a lot of people financially.
Dollar-cost averaging has benefits when done in a 401k plan with money yet to be earned. But, because stock prices tend to rise over time, it is better to put large lump sums such as inheritances or lottery winnings into the market relatively quickly.
Memorable quotes:
"[Compound interest is:] the greatest mathematical discovery of all time." - Albert Einstein
"Annual income twenty pounds, annual expenditure nineteen nineteen six, result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery." - Charles Dickens, "David Copperfield"
"Patience is a necessary ingredient of genius." - Disraeli
"No scientific evidence has yet been assembled to indicate that the investment performance of professionally managed portfolios as a group has been any better than that of randomly selected portfolios." - Burton Malkiel
The efficient market hypothesis states that the stock market accurately reflects all available information in current prices such that no individual investor can consistently earn extraordinary returns. If there were such a gauranteed method, other smart investors chasing similar profits would soon make the endeavor unprofitable. In fact, Malkiel and others say that price movements are random or without discernible pattern. The randomness comes in the form of new information, which, by definition, is random. A product's success or failure, an airliner crashing, the result of a court case, and countless other factors that impact companies constitute the news. However, this news is never perfectly foreseeable, and predictions are already factored into the price of the stock. For example, when ConocoPhillips wrote off over $30 billion in goodwill during the 4th quarter of 2008, the stock price did not tumble greatly. The news had already been incorporated.
This idea is proven most easily by the fact that 80% of fund managers fail to beat the market (usually an index fund they use as a target). This is because actively managed funds charge high fees and generate many more trades which must be taxed. Additionally, the 20% who do beat the market in any given year fail to reliably do so the following years. Therefore, it makes sense to mimic the market as cheaply as possible to ensure the highest possible return. Again, this does not mean that people can consistently earn abnormal rates of return. Even recognizing a bubble during the bubble (a difficult task in itself) does not ensure success. Shorting a stock too early or a tulip in Holland could prove disasterous if the bubble continues to expand. Also, recognizing consistent patterns such as the January effect does not mean they can be profitably exploited. Transaction costs often prevent exploiting differences from being worthwhile.
An interesting aspect not addressed by Malkiel in this edition is the ever decreasing cost of buying and selling securities. Zecco.com now allows free trade if you meet certain requirements. My theory is that as transaction costs diminish, so will the perceived "inefficiencies".
Interesting tidbits:
The Indian who sold Manhattan Island for $24 in 1626 would have more than $50 billion if he invested it at 6% interest compounded semiannually.
Neither technical analysis (following past stock prices through charts) nor fundamental analysis (predicting future earnings based on assumptions and guesses) have proven to consistently beat the market. Malkiel still prefers fundamental analysis to the chartists who ignore ALL information about the stock other than the past prices.
Diversification ceases to add additional benefits after 20 stocks or so; a portfolio of 20 stocks is as no more or less risky than a portfolio of 1000 stocks. These benefits come in the form of lower risk or volatility and more consistent returns. Index funds are generally well diversified, which is yet another reason to buy them. Diversification is the meat behind Modern Portfolio Theory, invented in the 1950s by Harry Markowitz of the University of Chicago who won the Nobel Price in Economics for his work. Diversification can be achieved through asset classes (real estate vs stocks vs bonds), company size (small, mid, and large cap), geography (U.S. vs Europe vs Asia), and other ways.
Bond investors got hammered from 1969 through 1981 because of an 8% rate of inflation, which was higher than their returns on the bonds. Additionally, despite real negative rates of return (loss of purchasing power) the bond holders had to pay regular income tax rates on their coupons. They were literally paying money on top of subsidizing the borrowers--a double whammy. Government inflationary and tax policy harmed a lot of people financially.
Dollar-cost averaging has benefits when done in a 401k plan with money yet to be earned. But, because stock prices tend to rise over time, it is better to put large lump sums such as inheritances or lottery winnings into the market relatively quickly.
Memorable quotes:
"[Compound interest is:] the greatest mathematical discovery of all time." - Albert Einstein
"Annual income twenty pounds, annual expenditure nineteen nineteen six, result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery." - Charles Dickens, "David Copperfield"
"Patience is a necessary ingredient of genius." - Disraeli
"No scientific evidence has yet been assembled to indicate that the investment performance of professionally managed portfolios as a group has been any better than that of randomly selected portfolios." - Burton Malkiel
February 7, 2021
I read this book in the ‘90s. It has some good solid advice about the importance of diversification and the problems with timing market investments.
3 stars. 4 stars for the advice but certainly a dry subject.
3 stars. 4 stars for the advice but certainly a dry subject.
June 18, 2023
Lengvas skaitinukas. Gerai apžvelgti burbulai ir nuotaikos vyraujančios tuo metu. Nors nieko labai naujo, bet keletas įdomių minčių buvo. Kartais norisi apžvalginio turinio, tam pilnai tinkama knyga.
December 7, 2021
I read pretty much the entire book on a train on the way to work so that attests to the digestibility of Malkiel's writing. And digestible it must be because all 400ish pages are meant to help the common investor by dispensing one solid adage, perhaps the only one that's withstood every crash and turmoil: you cannot beat the market consistently.
A. The market is dumb, but you're not any smarter
The book starts off with a history of financial crashes and market irrationality ever since the concept of equity existed. Malkiel concludes that markets are not always or even usually correct, but no one individual or institution knows more than the market. Malkiel insists that markets are ultimately efficient, the only question being how long it takes for the financial laws of gravity to take effect. But personally what's perhaps a more apt description is that markets have been and always will be batshit crazy, and the only way you can outsmart it is through luck. So as common investors we ought to just rely on the gradual upward tendency of the market as a whole rather than pick individual stocks or attempt the daredevil act of timing the market.
B. Neither are the pros
At least we can find solace in the fact that its not just the everyday investor that fails, but even the supposed "smart money" fails with us as well despite their arithmetic sorcery and academic gymnastics. Malkiel lists a hosts of methods -- including one predicting markets based off the skirt length of women in that era -- and derives the same conclusion: you cannot beat the market consistently. This part also serves as a warning against trusting the words of affable salesmen and enticing fund managers who largely do no better than the s&p index over the long run.
But to be honest this large section (in fact, 2 parts) dedicated to finance might very well fly over the heads of the average reader. Especially towards the end about smart beta I got really lost and honestly couldn't be bothered to parse through it.
C. But you can still make money
In the final part Malkiel actually provides specific advice on managing your personal portfolio according to your risk appetite and tolerance (varying with age). He introduces various types of investment instruments along with their riskiness, then gives practical steps on portfolio allocation, dollar cost averaging, rebalancing, etc. for a guaranteed return by retirement (unless of course the capitalist institution collapses). Honestly, if you're not into finance and are just looking to retire comfortably, this is really the only part of the book you need to read -- and really should read.
A. The market is dumb, but you're not any smarter
The book starts off with a history of financial crashes and market irrationality ever since the concept of equity existed. Malkiel concludes that markets are not always or even usually correct, but no one individual or institution knows more than the market. Malkiel insists that markets are ultimately efficient, the only question being how long it takes for the financial laws of gravity to take effect. But personally what's perhaps a more apt description is that markets have been and always will be batshit crazy, and the only way you can outsmart it is through luck. So as common investors we ought to just rely on the gradual upward tendency of the market as a whole rather than pick individual stocks or attempt the daredevil act of timing the market.
B. Neither are the pros
At least we can find solace in the fact that its not just the everyday investor that fails, but even the supposed "smart money" fails with us as well despite their arithmetic sorcery and academic gymnastics. Malkiel lists a hosts of methods -- including one predicting markets based off the skirt length of women in that era -- and derives the same conclusion: you cannot beat the market consistently. This part also serves as a warning against trusting the words of affable salesmen and enticing fund managers who largely do no better than the s&p index over the long run.
But to be honest this large section (in fact, 2 parts) dedicated to finance might very well fly over the heads of the average reader. Especially towards the end about smart beta I got really lost and honestly couldn't be bothered to parse through it.
C. But you can still make money
In the final part Malkiel actually provides specific advice on managing your personal portfolio according to your risk appetite and tolerance (varying with age). He introduces various types of investment instruments along with their riskiness, then gives practical steps on portfolio allocation, dollar cost averaging, rebalancing, etc. for a guaranteed return by retirement (unless of course the capitalist institution collapses). Honestly, if you're not into finance and are just looking to retire comfortably, this is really the only part of the book you need to read -- and really should read.
September 2, 2021
In preparation for my MGT12 Personal Finance class this quarter. Will definitely reread.
Mistakes I made in past and what I learned:
- prev. only held S&P500 index funds when they only represent 70% of the US market. For a young, long-term investor like me or a college student, it makes the most sense to take aggressive risk for higher returns, which is a key feature of low-cap stocks.
- one of most common mistakes is not having enough international diversification. Countries w young populations (BRIC, esp China) will likely consist a significant share of the world market in the next few decades. I love America, but I gotta diversify
- one mistake I made when rebalancing my portfolio was I accidentally sold some shares that I held for less than 1yr (due to a clerical error) so now I have to pay short-term cap gains tax on some of the profit (only 10%, but still a mistake to not repeat in the future, esp with a larger portfolio).
- and many more... but this, like everything, is a learning process.
More key lessons learned:
-Rebalanced my portfolio to incl. diversification in more than just a SP500 fund. 100% asset allocation to aggressive growth stock funds: 50% US Total Market, 30% Developed Intnl Mkts, 20% Emerging Intnl Mkts. And plan to adj. to incl bond funds, dividend funds according to glide path of target retirement funds w/o the high expense ratios.
- compound interest is ridiculously powerful, but needs time and consistent investments
- bond asset allocation isn't important for young investors bc it is too low risk and will stunt growth. Portfolio asset allocation should shift from stocks to bonds/high dividend/money market funds over time. Bond formula: % bonds = (2*age)-80, so most people don't need bond funds until like 40 when lower risk investments makes more sense nearing retirement.
- When done correctly, avoiding frequent trading, an investor should be pay no or minimal taxes, esp in tax advantaged accts like Roth IRA, 401k, etc. Long-term capital gains taxes is $0 for gains up to $40k.
- and many more lessons to learn upon reread.... Lots I didn't get.
Mistakes I made in past and what I learned:
- prev. only held S&P500 index funds when they only represent 70% of the US market. For a young, long-term investor like me or a college student, it makes the most sense to take aggressive risk for higher returns, which is a key feature of low-cap stocks.
- one of most common mistakes is not having enough international diversification. Countries w young populations (BRIC, esp China) will likely consist a significant share of the world market in the next few decades. I love America, but I gotta diversify
- one mistake I made when rebalancing my portfolio was I accidentally sold some shares that I held for less than 1yr (due to a clerical error) so now I have to pay short-term cap gains tax on some of the profit (only 10%, but still a mistake to not repeat in the future, esp with a larger portfolio).
- and many more... but this, like everything, is a learning process.
More key lessons learned:
-Rebalanced my portfolio to incl. diversification in more than just a SP500 fund. 100% asset allocation to aggressive growth stock funds: 50% US Total Market, 30% Developed Intnl Mkts, 20% Emerging Intnl Mkts. And plan to adj. to incl bond funds, dividend funds according to glide path of target retirement funds w/o the high expense ratios.
- compound interest is ridiculously powerful, but needs time and consistent investments
- bond asset allocation isn't important for young investors bc it is too low risk and will stunt growth. Portfolio asset allocation should shift from stocks to bonds/high dividend/money market funds over time. Bond formula: % bonds = (2*age)-80, so most people don't need bond funds until like 40 when lower risk investments makes more sense nearing retirement.
- When done correctly, avoiding frequent trading, an investor should be pay no or minimal taxes, esp in tax advantaged accts like Roth IRA, 401k, etc. Long-term capital gains taxes is $0 for gains up to $40k.
- and many more lessons to learn upon reread.... Lots I didn't get.
October 14, 2022
I’ve been wanting to gain more understanding of investing and the stock market, and this book was a good place to start. I utilized the 2012 book (cause that’s what the library had), and while I would have preferred the most recent addition, it was still very useful. My biggest critique was that Malkiel sometimes forgot who his audience was supposed to be. There were times the author explained things very well and with the thought that this book is meant for newbies in the world of finance. Unfortunately there were other times were it was obvious prior knowledge was needed for a full understanding. Furthermore, he went very in-depth on certain subjects he disagreed with and I would have preferred he spent more time talking about what he actually believes about finance. At over 400 pages it felt like it needed a good editor, however I’m glad to have read the book as I feel I have a better understanding of how to invest and pitfalls that can accompany investing.
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