If there is a finance book that stays updated along with time and has a solid foundation of historical analyses and seasoned knowledge, it is this book: “A Random Walk Down Wall Street.”
Author and economist Burton G. Malkiel has been revising this book afresh for 10 editions since its first publication in 1973.
Malkiel’s main idea running through the entire book is this: “markets are reasonably efficient,” and many people would do just as well as experts if they bought diversified fund portfolios and held onto them long-term. It sounds simple enough, but as the thickness of the book might suggest, there are more questions and arguments to be dealt with than one would’ve imagined.
All the information in this bestseller may seem weighty, but Malkiel begins with the reassurance that the load of facts and figures he offers should not “worry you” and that all you need is “the interest and desire to have your investments work for you.” Somehow, all the pieces of this text are essential, and one would do well to take a good walk through it.
Malkiel, a Princeton professor of economics and department chair, is a fan of the efficient market hypothesis, which argues that although the market is not free from errors – because there is always a prediction element involved – it is proficient because things adjust over time.
Since there is no way to predict future stock prices, Malkiel points out the silliness of trying to forecast the future based on past performance. That is what brings him to a “random walk” through the avenues and alleys of finances and investing.
Malkiel gives a thorough explanation of different investing theories and types of analysis. Starting out with the “firm foundation” and “castle in the air” theories, he breaks investing down to two broad categories: one can either invest based on the actual real value of the stock or invest in response to what the crowd is doing and ride the waves.
Malkiel recounts the history of stock crazes starting from centuries back, such as the tulipomania in the 1600s, the South Sea bubble and the market crash in the early 20th century. The reader is brought to a realization of the author’s point: namely, that there is a pattern in the market’s going irrational and leveling out, and this is because markets are efficient and able to adjust when hit with occasional inefficiencies.
By now, Malkiel has done a fine job convincing the reader that one’s chances of consistently beating the market are so slim that it makes more sense to use broad-based index funds to invest. For both stocks and bonds, “indexing is the strategy [Malkiel] most highly recommend[s] for individuals and institutions.”
After walking through a chunk of the book on risk in relation to rewards, Malkiel moves on to explain the psychology behind investing and gives several tips on things to avoid. From here on, it seems it is time for practical advice for individual investors.
A reader finds a detailed description of how one’s portfolio should look depending on age. Even as Malkiel argues for safe investing with a buy-and-hold strategy, he is not entirely risk-averse. He does recommend assuming more risk if one is young with many years of employment ahead, topping it with a chart to gauge one’s risk appetite.
Further, Malkiel avers, “Those with speculative temperaments will undoubtedly prefer using their own steps to pick winners.” He then offers step-by-step guidance on how to pick individual stocks.
The bulk of information available in this book is definitely worth probing. With a sense of humor behind the text, Malkiel gives easy and engaging narratives of his thoughts. Although it is clear that Malkiel has a distinct point of view and does a good job advocating it, he does offer alternatives to his beliefs should a reader disagree. For those with any interest in the functions of Wall Street and personal investing, this book is a great resource.