Book Review: A Random Walk Down Wall Street

Book Review: A Random Walk Down Wall Street

Finally the book lists specific portfolio and fund recommendations for people in different stages of their lives. The chapter on behavioral finance is new for the 9th edition. It reviews how investors often become their own worst enemy when it comes to investing. The book Why Smart People Make Big Money Mistakes And How To Correct Them covers this area in more details. Today I’m reviewing the book A Random Walk Down Wall Street by Burton Malkiel.

But, still following the “greater fool” theory is dangerous. So, don’t try to buy a shaky stock to sell it to a bigger fool because there may not be a bigger fool than you coming that way. Castle-in-the-air theory— Greater fool theory is its another name. As per this theory, successful investing depends on predicting the crowd’s mood.

Some consistent patterns of correlations, inconsistent with the model, have been uncovered. It is less clear that violations exist of the weak form of the efficient-market hypothesis, which states only that unexploited trading opportunities should not persist in any efficient market. Portfolio theory begins with the assumption that all investors are risk-averse. The theory tells investors how to combine stocks in their portfolios to give them the least risk possible, consistent with the return they seek.

Nifty Fifty— Some 50 solid growth stocks took Wall Street by storm. Firm-foundation theory— There’s an intrinsic value of stocks. This can be computed by discounting and adding future dividends. Warren Buffett and economist Irving Fisher swore by this theory.

The Divide Between Technical & Fundamental Analysis of Markets

Specifically, the author encourages ensuring that the investor is properly insured. Then, he offers investing mostly into tax-sheltered accounts. Regarding the investment instruments, Malkiel believes that in the long run, it is evident, that stocks will produce more return, than bonds yield, and beat the level of inflation.

Part one is an overview, and a fascinating history of speculative crazes. Part three describes Modern Portfolio Theory, efficient market theory, behavioral finance, and risk measurement, which form the basis for his recommended approach to investing. Part four is a practical guide, a tutorial on how to invest wisely. Originally written in 1973, this book popularized the "efficient market hypothesis" and passive investing, and helped spawn the index fund industry. The data shows that most actively managed mutual funds perform worse than random selections of stocks.

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.

Hot new topics include exchange-traded funds and investment opportunities in emerging markets, and there's a brand-new chapter on "smart beta" funds. As Malkiel describes repeatedly throughout A Random Walk, certain smart investments cease to be as smart when everybody does them. The success of the S&P 500 index mutual funds in particular may make future investing in the S&P 500 index less attractive for the purposes of achieving broad market returns. Author Lars Kroijer argues in his book Investing Demystified, persuasively I think, that the logical approach for someone who embraces the Efficient Market Hypothesis of A Random Walk is to invest in an ‘all world equities’ index. This product exists, and offers a cheap, maximally diversified way to wholly embrace Malkiel’s approach.

• Get a diversified portfolio of index funds and hold onto them for a good while and you'll do about as well as the market which for most of us is good enough.
• Technical analysis studies the performance of the market prices based on the historical data.
• Managing your portfolio and the markets is not a matter of joke.
• If beta is badly damaged as an effective quantitative measure of risk, is there anything to take its place?

Given the investment challenges in modern markets, Malkiel’s account provides a reassuring perspective. This is contrary to Robbins in MONEY Master The Game, who says the idea that bonds are less risky is wrong because stocks and bonds can often move in the same direction.

Dollar-cost averaging can be a useful, though controversial, technique to reduce the risk of stock and bond investment. Patience is key element in investing; you can’t afford to pull your money out at the wrong time. You need staying power to increase your earning attractive long-run returns. That’s why it is important to have non-investment resources to draw on should any emergency strike you or your family.

And, sell when the year starts because prices rise that time. This technique isn’t any better than buy-and-hold after transaction costs.

If you would like to learn more about long-term investing, check out this investor’s guide. Fundamental Analysis – This strategy focuses on key financial metrics of a company, not primarily its share price movement, to gauge its value. But random walk theory argues that the unreliability of corporate data and the likelihood that even reliable data will be misinterpreted render fundamental analysis unsuccessful. Most proponents of the random walk theory apply it to short- and mid-term trading. They don’t argue that long-term values move unpredictably.

It's a classic that I highly recommend for anyone who wants to get serious about investing and financial matters. Dollar-cost averaging has benefits when done in a 401k plan with money yet to be earned.

Review

One insight he shares is the Modern Portfolio Theory (MPT) that is now widely followed on the Street since it is so basic. In this chapter, he further describes the origins and applications of Modern Portfolio theory.

the book is worthy of reading repeat and then You must carry out the finance of index fund. Value stocks tend to outperform growth, because investors tend to overpay for growth. This may be due to higher risk, or survivorship bias. He does feel that in the middle of this decade we live in an environment that is not likely to offer large returns.

Basically the central thesis of “A Random Walk Down Wall Street” is that stocks move in a random pattern which cannot be predicted. Burton largely espouses the efficient-market theory over the long run. But he adds that there are exceptions and, in the short term, markets are much more random than economists had long believed.

Our very own Joe Anderson, President of Pure Financial,was asked to share his favorite book on investing and explain why his favorite is unique among the thousands of other personal finance books. Share your thoughts on this classic investing book in the comments. Master every aspect of your business and financial life with expert advice and book summaries on topics ranging from business, finance to investment.