A Random Walk Down Wall Street Summary: Burton G. Malkiel

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A Random Walk Down Wall Street Summary

A Random Walk Down Wall Street Summary provides a free full summary, key takeaways, top quotes, author biography and other essential points of Burton G. Malkiel’s book about Wall Street.

Burton G. Malkiel wrote this book A Random Walk Down Wall Street in 1973. This was few years after the 20th century’s first computer technology bubble popped. The latest edition comes after the dot.com bubble pop. This was the last of the 20th century’s technology bubble. Investors hurt by the first bubble can be excused. Because they didn’t have this book back then. But, it’s shocking how this era investors didn’t heed to what Malkiel taught. This book is a must on every investor’s shelf. And, all investors must consult this book before taking an investment decision. Many investment books aren’t reliable. It’s because their authors are mainly selling the book. But, Malkiel doesn’t want to sell. Instead, he’s a teacher having the discipline of a real financial economist. His writings are as rich as an expert journalist. We highly recommend this book A Random Walk Down Wall Street.

This summary Will Help You Learn

  • The realities of investment life.

Take-Aways

  • It’s not that tough to earn money in the share market.
  • Investors often neglect the lessons of the past.
  • It’s tough to fight the emotional attraction of a likely bonus
  • In the end, the market will find real value or something near it.
  • A stock can’t have more value than the cash its investors make.
  • Investors must benefit from tax-favored investment plans and savings.
  • The ideal investment strategy is indexing.
  • Many market variances, for example, January effect, aren’t playable.
  • Avoid paying for stock more than its actual worth.
  • The market is not predictable. But, investors are better than speculators in the long run.

Best Selling Books

SaleBestseller No. 1
A Random Walk down Wall Street: The Time-tested Strategy for Successful Investing
807 Reviews
A Random Walk down Wall Street: The Time-tested Strategy for Successful Investing
  • W W Norton Company
  • Burton G. Malkiel
  • Publisher: W. W. Norton & Company
  • Edition no. 0 (01/04/2016)
  • Paperback: 496 pages
SaleBestseller No. 2
A Random Walk Down Wall Street: The Time-Tested Strategy for Successful Investing (Tenth Edition)
807 Reviews
A Random Walk Down Wall Street: The Time-Tested Strategy for Successful Investing (Tenth Edition)
  • Burton G. Malkiel
  • Publisher: W. W. Norton & Company
  • Edition no. 0 (01/02/2012)
  • Paperback: 496 pages

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Suggested Reading: One Up On Wall Street Summary

A Random Walk Down Wall Street Summary

Define a “Random Walk”

So, what does the saying “stock prices are a random walk” mean? Well, it says that short-term shifts in price are not predictable. This frustrates Wall Street professionals. It’s because people pay them for their vast knowledge of the market moves. But, the past is apparent. Investors who avoid predicting the market shifts do better than speculators. Hence, investment theories are critical. Two of the most key investment premises include:

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.

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. Hence, an investment is worth anything people are ready to pay. And, people are not very logical.

There’s enough proof to suggest that market acts illogically. Sometimes, prices are way over their real values. And, sometimes the prices fall very low. Guessing such irrationality is tough. And, profiting from this is more robust.

History’s Most Famous Market Manias: 

  1. Tulipmania — 17th century Holland suffered from this mania. The prices of tulip bulbs were insanely high. So much so that people even mortgaged their houses to buy them. The market came down in 1637.
  2. South Sea Bubble — Gripped 18th century UK. There was a craze for the attractive but worthless South Sea Company. This mania peaked and fell-out in 1720.
  3. Roaring Twenties — America’s most crazy speculative events began in 1923. This ended with a crash in 1929 which led to the Great Depression.
  4. Soaring Sixties — The first tech stock bubble was during 1960s. Speculators ran toward any issue which had “electronic” in its name. This age also saw a speculative affair with concept stocks and MNCs.
  5. Nifty Fifty — Some 50 solid growth stocks took the Wall Street by storm. These included IBM, Avon, Xerox and the likes. This trend sent their P/E ratios to double digits. But, all this crashed.
  6. Roaring Eighties — A new issue of mania came in 1983. The joy of the biotech craze and LBO boom got over in 1987.
  7. The Japan Bubble — The Imperial Palace in Tokyo had real estate worth more than all land in California. This was during some time in 1989. The Japanese share market had the value of 45% of the world’s market. It crashed in 1990.
  8. Internet Bubble – The NASDAQ was led by high-tech firms in the late 90s. The market tripled before it crashed.

The Market Bubbles

A market bubble is nothing more than a Ponzi scheme. It booms till speculators are ready to put in cash. But, fails as soon as cash stops coming in. In the 1990s, the internet boom was unique. But, it involved unique neglect of basic investment logic. Also, there was a high level of corruption of conflict of interest. The Chinese Walls were separating analysts from

investment bankers and brokers. These walls became leaky when the internet boom came. Analysts found that their jobs relied on offering unstable stocks good recommendations. Why? Because their companies’ brokers could earn massive working for the analyzed firm. But, firms hired companies that recommended their shares. Many internet firms didn’t have any history. These firms weren’t worthy investments when analyzed with old metrics. Hence, analysts came up with new parameters. The media drove speculation by converting these internet start-ups into stars. 

Knowing the history and basics can help prevent massive losses of the popping bubbles. The passion of investors plays a part in share prices. 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.

Tools of the Crystal Ball

Professionals use many tools to predict share prices. These include technical and core analysis. Technical analysists try to predict patterns by charting old share prices. These analysts are building castles in the air. It’s because they think that prices depend on crowd mindset. They also believe that prices are repetitive and hence predictable. But, in reality, share prices are as random as possible. Flip a coin 100 times and draw the results. Your graphs will look similar to the share prices chart. It’s because coin flips are also random. But, on charting them, you’ll have long strings of tails and heads. This string looks like up and down-market shifts.

Worthless Investing Theories

Be very careful of these familiar but useless investing theories: 

  1. Filters— Any share which shifts up from a low or vice versa is on a trend that’ll continue. Filter strategies don’t do better than the buy-and-hold when considering transaction costs. Brokers swear by them, though, as they produce commissions.
  2. Dow theory— Buy when market beats its last high. And, sell when it falls below its previous low. Evidence suggests it’s a money-losing trick.
  3. Relative strength— Buy stocks which beat the market. And, sell the ones who underperform. This technique isn’t any better than buy-and-hold after transaction costs.
  4. Price-volume— Gathers investor emotions from price rise or price falls. Trading becomes necessary because of price-volume methods. Investors will earn more if they buy and hold. The returns aren’t worth the transaction costs.
  5. Chart patterns— Computer tests show that chart patterns don’t have any predictive power. These patterns include diamonds, head-and-shoulders, etc.
  6. Hemline indicator— If hemline increases, so will the share prices and vice versa. Stock prices and hemlines have some link. But, there isn’t much predictive power.
  7. Super Bowl indicator— NFL win leads a bull run. Or AFL brings in the bears. Though this has happened. But, it was a coincidence. There’s no justification to see it as a predictor.
  8. Odd-Lot theory— Layman can’t afford whole 100-share round lots. Hence, they buy odd lots. As they are often wrong, buy when they sell. And, sell when they buy. There’s no proof this works. Besides, trading costs make it costly.
  9. Dogs of the Dow— Buy Dow shares having the highest dividend returns. Even the person who created this trick admits it doesn’t work.
  10. January effect— Buy at the end of the year. At that time prices of small stocks fall. And, sell when the year starts because prices rise that time. But, trading expenses cancel this out.
  11. Weekend effect— Says that shares have negative yields Friday to Monday. Hence, don’t buy on Friday. Instead, buy on Monday noon.
  12. Momentum investing— Momentum investors drive trends. They hope that trend is their friend. It’s because they think the market will keep on doing what it just did. But, in reality, momentum investors perform worse than buy-and-hold investors.

Fundamental Analysis

So technical analysis is of no use. Is fundamental analysis any good? This analysis belongs to the firm-foundation school. These analysts believe in examining data about a firm. Such data gives a fair prediction about its future earnings. Hence, the analysts think of it as a reasonable estimate of the underlying value. But it’s not possible to predict a firm’s future confidently. A firm’s previous earnings don’t give sound estimates of its future earnings. Past performance can’t work as a guide for future performance. Plus, a historical review of earnings is upsetting. Short-term estimates of analysts were even less sound than long-term estimates. Reason? There’re many:

  1. Experts aren’t that expert— They aren’t perfect. But their self-confidence even beats their imperfection.
  2. Stuff happens— Estimates can’t forecast accidents, deregulation, terrorism or changes in raw material prices.
  3. Creative accounting— The data they’re seeing could be fraudulent.
  4. Incompetence— Analysts are many times lazy, careless and unskilled.
  5. Corruption or conflict-of-interest — Analysts aren’t calm truth seekers. Companies pay them just because they can sell securities. The ones who can’t play along can’t last.

Index and Diversify for Efficiency

Overall, fundamental analysis is also useless. So, where does the investor stand now? Remember one thing – the market is more-or-less efficient. Hence, share prices show much crucial information about a firm’s future. They also reflect the possible direction of the market. Markets respond fast to new information. This is an important factor that drives share price moves. Even Warren Buffett and Benjamin Graham said that individual investors should buy index funds. They must avoid picking stocks or investing with a fund manager. The market isn’t entirely efficient. Hence, people fall prey to manias. Data may not reach stock prices as fast as the efficient-market advocates think. But, overall, one can’t beat the market. It’s almost impossible. 

Still few investors become rich by selling and buying shares. So, what do they do which others don’t? Its answer is – they take the risk. The only way one may have high yields is by taking risks. A study by Ibbotson Associates showed that returns are linked with risk. Common shares belong to the maximum-return asset group. They also carry the highest risk. As per Modern Portfolio Theory, you can spread your funds over a range of risky securities. And, the overall risk of your portfolio will be less than that of any security. Plus, you’ll still get high returns. Diversification is the key here. It gives the lowest risk with a high return.

Diversification

Place your apples in as many baskets as you can. A globally diverse portfolio has less risk than an entirely US portfolio. From 1970-2002, the lowest risk and highest return were of a portfolio with 76% US and 24% non-US stocks. But, the advantages of global diversification are reducing now. It’s because developed global and US markets are moving more in tandem. But, growing market changes and currency distinctions can disturb market situations. Hence, diversify across asset groups as well besides common shares. Two other asset groups are government bonds and REITS. Through REITs, you can buy shares in real estate. These don’t move in line with the stock market. Inflation is a blessing for bond investors. Hence, go for inflation-safe bonds. But, tax law is not good for them. So, use such bonds in tax-protected plans.

The best an investor can do to succeed in the stock market is diversifying. Investors must also lower their costs. Also, try not to outguess others about future prices. This is because even experts fail in this. Be a passive investor who has a diverse index. This way you’re likely to perform better than a person investing in actively managed funds.

Best Selling Books

SaleBestseller No. 1
A Random Walk down Wall Street: The Time-tested Strategy for Successful Investing
807 Reviews
A Random Walk down Wall Street: The Time-tested Strategy for Successful Investing
  • W W Norton Company
  • Burton G. Malkiel
  • Publisher: W. W. Norton & Company
  • Edition no. 0 (01/04/2016)
  • Paperback: 496 pages
SaleBestseller No. 2
A Random Walk Down Wall Street: The Time-Tested Strategy for Successful Investing (Tenth Edition)
807 Reviews
A Random Walk Down Wall Street: The Time-Tested Strategy for Successful Investing (Tenth Edition)
  • Burton G. Malkiel
  • Publisher: W. W. Norton & Company
  • Edition no. 0 (01/02/2012)
  • Paperback: 496 pages

Suggested Reading: Security Analysis Summary

Suggested Reading: The Intelligent Investor Summary

A Random Walk Down Wall Street Quotes

“It is not hard, really, to make money in the market.”

“The indexing strategy is the one I most highly recommend.”

“A biblical proverb states that ’in the multitude of counselors there is safety.’ The same can be said of investment.”

“Of course, earnings and dividends influence market prices, and so does the temper of the crowd.”

“Although stock prices do plummet, as they did so dis­as­trously during October 1987 and again during the early 2000s, the overall return during the entire twentieth century was about 9% per year, including both dividends and capital gains.”

“As long as there are stock markets there will be mistakes made by the collective judgment of investors.”

“Nev­er­the­less, one has to be impressed with the substantial volume of evidence suggesting that stock prices display a remarkable degree of efficiency.”

“It should be obvious by now that any truly repetitive and exploitable pattern that can be discovered in the stock market and can be arbitraged away will self-de­struct.”

“The ’cycles’ in the stock charts are no more true cycles than the runs of luck or misfortune of the ordinary gambler.”

“The mystical perfect risk measure is still beyond our grasp.”

“Can you continue to expect a free lunch from in­ter­na­tional di­ver­si­fi­ca­tion? Many analysts think not. They feel that the glob­al­iza­tion of the world economies has blunted the benefits of in­ter­na­tional di­ver­si­fi­ca­tion.”

“It is clear that if there are exceptional financial managers, they are very rare, and there is no way of telling in advance who they will be.”

About the Author

Burton G. Malkiel has the Professorship of Chemical Bank Chairman at Princeton University. He was earlier the member of Council of Economic Advisors. Malkiel serves on boards of many big companies. These include Vanguard Group of Investment Cos. And Prudential Financial Corp.

Feedback

Having read this A Random Walk Down Wall Street Summary, what do you think? It shows you the reality of Wall Street. Do you have any comment to share with us? We are happy to receive your thought on it.

Suggested Reading: Security Analysis Summary

Suggested Reading: The Intelligent Investor Summary

Last update on 2018-07-18 / Affiliate links / Images from Amazon Product Advertising API

2 COMMENTS

  1. Well, you are right investors should read and consult this book before taking any decision for the investment. The examples of real-life events can play the vital role in explaining that how the market manias changes and how share prices go up and down rapidly. According to my views, investors should understand the trend and possibilities before purchasing the shares in a company.

  2. Yes, I agree, that experts are not expert at all times, in fact, they also face imperfection because of their overconfidence. Fundamental analysis is better than technical analysis but my suggestion is to prefer the index and diversity for efficiency especially if you are the individual investor. the portfolio should contain diversified investments buying from the US only has the greater risk than buying from various areas of the world.

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