A Random Walk Down Wall Street

Burton Malkiel’s book, A Random Walk Down Wall Street, was first published in 1973. Burton Malkiel is currently a professor of economics at Princeton — although he really needs a good web designer for his site.

I recently picked up a revised copy of his book published in 2007. Written before the current economic mess, it was helpful to refresh my perspective on the reason for investing and the differences between active and passive investing. Malkiel does not take long to get to the point of his book. In the preface to the ninth edition, he makes the message clear in the second sentence:

Investors would be far better off buying and holding an index fund than attempting to buy and sell individual securities or actively managed mutual funds.

And he makes his case in the second paragraph:

Now, over thirty-five years later, I believe even more strongly in that original thesis, and there’s more than a six-figure gain to prove it. I can make the case with great simplicity. An investor with $10,000 at the start of 1969 who invested in a Standard and Poor’s 500-Stock Index Fund would have a portfolio worth $422,000 by 2006, assuming that all dividends were reinvested. A second investor who instead purchased shares in the average actively managed fund would have seen his investment grow to $284,000. The difference is dramatic. Through March 31, 2006, the index investor was ahead by $138,000, an amount almost 50 percent greater than the final stake of an investor in a managed fund.

His book is an engaging read. Accessible and helpful for the novice investor and a stern reminder to the experienced investor: passive investing will trump active investing over the long term.

When the markets go south, lots of stocks go on sale. And the temptation right now is to go stock picking. Time to put that strategy into perspective.

2 replies
  1. Allen Woolfrey
    Allen Woolfrey says:

    Thank you for this post.

    Many years ago, I started to read an earlier edition of this book, but stopped when I concluded (falsely?) that my investment heroes Warren Buffett and Benjamin Graham would not agree with the author.

    Spurred by your post, I purchased the latest edition of the book and have been reading it with relish. The author’s history of bubbles and fraud in Part One is fascinating.

    Thanks again for the recommendation.

    Cheers, Al.

    Reply
  2. Allen Woolfrey
    Allen Woolfrey says:

    I read and embraced “A Random Walk Down Wall Street”; now I recommend “The Myth of the Rational Market” by Justin Fox as a good counterpoint to EMH…the Efficient Market Hypothesis.

    The book is really a lot more than that however. It is a survey of market hypotheses from the early 20th century to current times. EMH was a breakthrough idea that was and is quite helpful, but doesn’t tell the complete story. It seems there is nothing as elegant as EMH to replace it today; things are somewhat messy now.

    The “strong” EMH idea that the market couldn’t be beat, because it completely reflects all knowledge, is, apparently, now in retreat. Reading Fox’s book helps understand where we have been and what is current investment thinking.

    Reply

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