Non-fiction 06 Dec 2004 12:39

A Random Walk Down Wall Street

coverA Random Walk Down Wall Street
Burton G. Malkiel

More than a book about Wall Street, Mr. Malkiel has wrote what can almost be seen as a guide for life; or, at least, for the financial aspects of life.

The main thesis of the book is that there is no way of consistently “beating the market”; that is, earning investment returns above the average returns of the market in the long term. Some strategies may allow people to get large gains for a while, but that should in no way be attributed to skill; it may well be, and often is, blind luck, and a reversal of luck is always right around the corner. The reason for this is the basic principle of the efficiency of the market: if there were any way to consistently beat the market, everyone would sooner or later find out about it, and everyone would do it. In this way, any strategy for winning larger-than-average returns is, in the end, self-defeating (the author, of course, goes into much more detail).

The author presents and analyses several examples of strategies people use or have used in the market. In particular, he presents in detail the two main investment strategies around: the “fundamental” and the “technical”. The first one, which he refers to as the “firm foundations strategy”, asserts that each stock has a value, which can be derived from fundamental information on the company is represents: earnings, market value, growth forecast etc. Once you know the true value of a stock, you’ll be able to buy those that are undervalued (because they will eventually be valued correctly) and sell those that are overvalued (for the same reason).

The technical approach, on the other hand, believes that any existing information about a company is already reflected in the price of its stock; therefore, that is the only thing you need to look at. Technical analysts (aka “chartists”) usually surround themselves with charts, from which they can see where a stock is coming from and, from the pattern of its past prices, can predict where it’s going.

Both strategies share a fatal problem, though: ultimately, they depend on being able to predict the future in order to get gains. And, as is universally known, making forecasts is very hard, specially when they’re about the future.

In the end, the main recommendation of the author is that, in the long term (20 years or more), the best investment you can make is to put your money in a broad index fund. This type of fund tries to track a broad market index (such as the S&P500 in the US, or the All Ordinaries in Australia) in order to get average returns consistently. Because they are basically passive (the composition of the indexes does not change very often), administration costs are low. And, for the same reason, they are not particularly exciting.

For investors who want to “play the game”, the author also includes a series of recommendations that may help you to minimise your risk and get a reasonable return, while having some fun. Also, for this investor, the first few chapters of the book are an invaluable resource: they tell the story of all the major market bubbles of the past century, from the “tulip bulb craze” and the “South Sea Company bubble” in the 18th century Holland and England, respectively, to the quite recent Internet bubble of the late 1990s. If you are an active investor in the stock market, keep this book around and re-read these chapters every few months.

Buy from

Subscribe to the comments through RSS Feed

Leave a Reply