Review: A Random Walk Down Wall Street

Read:  A Random Walk Down Wall Street: The Time-Tested Strategy for Successful Investing by Burton G. Malkiel
Stars: Three and a half

Drinking: Constant Comment Green Tea, Bigelow

Malkiel’s seminal investment work is interesting, accessible, and thought-provoking. He looks at stock market trends and analyzes different investing strategies.  The conclusion is that over the last hundred years or so, buy-and-hold of index funds is the best method to earn money and minimize costs.  Malkiel uses economic and financial data to prove that most “beat the market” strategies or hot financial managers do not actually come out on top in the long run, though they may for the short run.

A “random walk” in mathematics is a data set that has no predictable pattern.  According to Malkiel, stocks are a random walk because despite what people want to believe, the price of a stock tomorrow has very little bearing on the price it has held at any time in the past.  While Malkiel concedes that sometimes new information can change a stock, for the most part the market is efficient at absorbing new information and having the price reflect that information almost instantly, especially since the internet has become such a great source of information.  Thus, any “hot tip” is unlikely to make one rich by giving enough of a head start to act on it.

My only real quibble with the book is that the most recent edition was published in 2006.  While I think the principles behind Malkiel’s theory still stand, it would have been interesting to see his take on the financial crisis -particularly since he heavily recommends buying real estate as investment.  (He does include the caveat that one should only do this if one can truly afford such a purchase).

Overall, A Random Walk Down Wall Street is an interesting resource for anyone wishing to learn about investing – which should be everyone.  However, it does not replace extensive research and the possibility of speaking to a professional about your needs and risk levels.

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