economics

A Random Walk takes the reader on a path from the point of view of an academic, rather than that of a trader. That is sufficient to make this book different from most other stock market tomes. Malkiel's premise is that neither the the average investor nor the professional trader can expect to perform better that the "market" over any significant period of time. He considers market events to be random, and thus unpredictable. He offers piles of data to support his contentions, and his arguments are compelling.

Yet, those who trade using technical analysis scoff at books such at this, claiming their systems consistently beat the averages. The author points to the fact that most managers of mutual funds, pensions etc. fail to perform better than index funds and Malkiel recommends that public investors place their investment money into broad based index funds. The S&P 500 Index fund is recommended, as it is unrealistic to expect fund managers to perform better.

This classic has been around for 30 years and this revised edition is worth your time, especially if you have never read an earlier edition. Just be aware that many technical traders consider this to be a work of fiction.

Burton G. Malkiel's "Random Walk," first published over 30 years ago, is now a classic text on investing and is surely worth anyone's time and effort. Simply written, Malkiel conveys the debate over the validity of the efficient market hypothesis with ease and effectiveness; this edition's updated comments on the dot-com craze are insightful and probably worth the price of the book themselves.

While I support the view that fundamental and technical analysis generally offer very little in the way of helpful advice, I believe that Malkiel's view that no investment strategy can beat the market over the long run is, to put it simply, irrefutable. Therein, however, lies its problem.

Suppose, for instance, that I have this remarkable strategy of buying and selling stocks which has earned me consistant long run returns on the market. Of course, if I tell anyone the specifics of this strategy and how wonderful it works, they will want to start using it for themselves. But then my strategy will stop working; the more people use a particular strategy, the harder it is for that strategy to continue work. Malkiel himself notes that if everyone uses the strategy of buying stocks on January 1st and selling them five days later, a simple strategy of buying on December 31st and selling on the 4th will generate consistant, long run returns. But then, if everyone adopts the new strategy, the long run returns vanish!

The key to a successful investing strategy, then, is to keep it secret. Since any strategy published in Malkiel's "Random Walk" is likely to be read and studied by millions, the moment he publishes something that would refute the efficient market hypothesis, the hypothesis is again reconfirmed. Clever devil, that Malkiel.

Other than that, my only problem with Malkiel's book is that he refers to countless articles and studies published in academia, but he leaves the inquiring reader clueless as to where to look for them. A simple "references" section would solve this problem (although it would easily provide further reason to justify publishing a new edition, thus earning Malkiel even more money).

In a nutshell Malkiel's advice is to own your own home, buy no-load index funds (equities and bonds), buy international index funds, and mix your investments according to your age. You should also have medical and plain term life insurance, and cash on hand for a few months in case of an emergency. This book is a complete course in how to manage your money effectively, whether you're a millionaire or a low-income earner. It also gently but firmly chastises proponents of get-rich-quick schemes such as day traders.

First, the book explains what is financial risk, and points out that everything is risky, even insured savings accounts since inflation can destroy the value of cash. Malkiel describes just how risky various investments are, and how the risk is one investment is often offset by the risk in another. Second, Malkiel describes a variety of specific investments (e.g. no load index funds, your own home, individual stocks) and suggests how individual investors should mix them, depending on their personal circumstances. For instance, an ambitious young woman in her twenties can consider aggressive high-risk high-growth funds. If they boom, she's rich, if they bust she's young enough to recover her losses through income. This would not be true of a middle-aged couple about to pay for their children's college years.

"A Random Walk Down Wall Street" should be in every family's library.