Book Review: A Random Walk Down Wall Street

“A Random Walk Down Wall Street” by Burton G. Malkiel is my all time favorite book in finance.  It has now reached 12th Edition in 2019 with over 1.5m copies sold.

A Random Walk Down Wall Street

This book was recommended by a friend of mine who studied it as part of his MBA program in George Town university. You can learn investment fundamentals in this book. Especially for individual investors who can apply a Do-It-Yourself method for investing rather than blindly following a mutual fund or wealth management professionals.

Have you heard about ‘The Tulip Bulb Craze” or “The South Sea Bubble” ? You will find a section on financial bubbles that will explain you all this. The latest edition even covers Bitcoin whether it is a bubble or not. I will not ruin it by giving you the answer. You better check it out as there is a context built in to it before giving the answer.

Academics argue there are two types of traders that follow either “Technical Analysis” or “Fundamental Analysis”. They do some experiments to prove some points supporting their views. An amusing one is a blinded monkey threw dart on stock listings and beat majority of The Wall Street’s professional investors.

On the other side of the spectrum Technical Analysts believe that everything about a stock is built in to its chart. For ex if stock price is going up they think it is because fundamentals should also be reflected in the chart that is why the stock’s price is going up!  ‘The Chartist’ do not even look at the company name or what company does. They just focus on ticker’s technical chart. They apply all kind of technical indicators to figure out how to trade. I have actually read a technical analysis book and reviewed it on this post. Then there is an efficient market theory as explained in the book like below;

Efficient Market Theory

“This is a statement of the efficient-market theory. The “narrow” (weak) form of the theory says that technical analysis—looking at past stock prices—cannot help investors. Prices move from period to period very much like a random walk. The “broad” (semi-strong and strong) forms state that fundamental analysis is not helpful either. All that is known concerning the expected growth of the company’s earnings and dividends, all of the possible favorable and unfavorable developments affecting the company that might be studied by the fundamental analyst, is already reflected in the price of the company’s stock. Thus, purchasing a fund holding all the stocks in a broad-based index will produce a portfolio that can be expected to do as well as any managed by professional security analysts.

The efficient-market theory does not, as some critics have proclaimed, state that stock prices move aimlessly and erratically and are insensitive to changes in fundamental information. On the contrary, the reason prices move randomly is just the opposite. The market is so efficient— prices move so quickly when information arises—that no one can buy or sell fast enough to benefit. And real news develops randomly, that is, unpredictably. It cannot be predicted by studying either past technical or fundamental information. ”

So What is a Random Walk?

It is simply stating that market itself so efficient that no one can predict tomorrow by applying technical or fundamental analysis. More than two-thirds of professional portfolio managers have been outperformed by the unmanaged S&P 500 Index. The study covered the last 40 years.

The author suggest investing in the stock market and compares historical gains in Stocks, Bonds, Bills, Gold, Oil and commodities. The most efficient way of investing in the stock market is buying and holding “Index Funds”. Invest early and regularly in the index funds, you will beat almost every professional fund manager. Stock picking is a very difficult task and not recommended for individual investors.

At the end of the book author wrote a chapter on “A-Life-Cycle-Guide-To-Investing” — will give you a clearer notion of how to decide what portion of your capital should be placed in common stocks, bonds, real estate, and short term investments. For example a 20 year old can take more risks and should invest in Emerging Markets. As there is a lifetime of earning ahead of the 20 year old and can afford to win or lose big.

As the investors get older they should invest in lower risk assets more focusing on high dividend stocks, bonds and REITs. That should provide a stable income in the absence of a salary.

The book provides very good fundamental finance information for individual investors. I learnt a lot from this book and I totally agree with the main theme of this book. Let’s have a look at last month March 2020 where the markets had worst ever monthly performance dropping around 30% range. It was so unpredictable and happened so fast that caught most of the professional and individual investors.

Even after Coronavirus started killing thousands in China the US stock market was at all time high! That did not make any sense to me at all. Luckily I changed my index fund VUSD to emerging market bond about a month before the crash. Of course I did not know that markets would crash. Some of the bonds I invested in like Sultanate of Oman government bonds also dropped in price around 35%. That was due to oil price crash which again was a surprise to all. The more you look into events you will convince yourself more that markets are really nothing but a Random Walk!

You have to accept the fact that you have no idea about what markets will do tomorrow. Markets are random and you are better following a strategy that you can sleep comfortably overnight regardless of the markets’ direction next day.

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