A Random Walk Down Wall Street Malkiel en 2834

7/27/2019 A Random Walk Down Wall Street Malkiel en 2834

1/5

Focus Take-Aways

Rating(10 is best)

Overall Applicability Innovation Style

To purchase personal subscriptions or corporate solutions, visit our website at www.getAbstract.com, send an email to [email protected], or call us at our U.S. office (1-877-778-6627) orat our Swiss office (+41-41-367-5151). getAbstract is an Internet-based knowledge rating service and publisher of book abstracts. getAbstract maintains complete editorial responsibility for allparts of this abstract. The copyrights of authors and publishers are acknowledged. All rights reserved. No part of this abstract may be reproduced or transmitted in any form or by any means,electronic, photocopying or otherwise, without prior written permission of getAbstract Ltd (Switzerland).

A Random WalkDown Wall StreetThe Time-Tested Strategy for Successful Investing

by Burton G. Malkiel

W.W. Norton 2007

480 pages

Leadership

Strategy

Sales & Marketing

Corporate Finance

Human Resources

Technology

Production & Logistics

Small Business

Economics & Politics

Industries & Regions

Career Development

Personal Finance

Self Improvement

Ideas & Trends

It is not all that difficult to make money in the stock market.

It is hard to resist the emotional pull of a possible windfall.

Investors often ignore the lessons of financial history.

Ultimately, the market finds true value or something close to it.

In the long term, a stock cant be worth more than the cash it brings to investors.

Investors should take advantage of tax-favored savings and investment plans.

The best investment strategy is probably indexing.

Most so-called market anomalies (January effect, etc.) arent really playable.

Never pay more for a stock than its really worth.

The market is, for all practical purposes, unpredictable, but investors do better than

speculators over the long haul.

9 10 9 8

This summary is restricted to the personal use of Min Park ([email protected])

cu:1243793 asp:2539 aff:- lo: en co:US] 2013-05-13 19:27:02 CEST


2/5

A Random Walk Down Wall Street Copyright 2003 getAbstract 2 of 5

Relevance

What You Will Learn

In this Abstract, you will learn the facts of investing life, without a sales pitch to distort

the information.

Recommendation

The first edition of Burton Malkiels A Random Walk Down Wall Street appeared in

1973, a few years after the twentieth centurys first big computer technology bubble, the

go-go era, popped. This, the newest and eighth edition, appears after the popping of the

dot.com bubble, the last of the twentieth centurys great computer technology bubbles.

Investors burned in the first bubble could have been excused; after all, they didnt have

Malkiels book. But its astounding how avidly Internet speculators threw aside all that

Malkiel and others had taught them. This book belongs on every investors bookshelf,

and ought to be consulted, or at least touched to the forehead, before any investment deci-

sion. Most investment books arent trustworthy, because their authors are salespeople

who are really making a pitch instead of trying to inform you. Malkiel is disinterested.He is a teacher with the intellectual discipline of a true financial economist, and yet he

writes as vividly as a good journalist.getAbstractrecommends this classic: all you need

to know about the market is between its covers.

Abstract

Define a Random Walk

When we say that stock prices are a random walk we mean that short-term price moves

are unpredictable. This infuriates Wall Street professionals whose comfortable living

often depends on people paying them for their supposedly superior knowledge of whatthe market is about to do. But history is pretty clear. Investors who dont try to profit by

predicting market moves do better, by and large, than speculators who attempt to cash

in on short term predictions. Investing in investment theories doesnt make a great deal

more economic sense than that. Two of the most popular investment theories are:

Firm-foundation theory Stocks have an intrinsic value that can be calculated

by discounting and summing future dividend flows. Adherents to one or another

form of this theory include economist Irving Fisher and investor Warren Buffett.

Castle-in-the-air theory Also known as the greater fool theory, this postulates

that successful investing is based on predicting the mood of the crowd. An investment

will be worth whatever people are willing to pay, and people arent very rational.

Ample evidence indicates that the market behaves irrationally, sometimes setting

prices way above realistic values, sometimes dragging them far below. Predicting this

irrationality is quite difficult, and profiting from it is even harder. Historys most famous

market manias include:

Tulipmania Gripped early seventeenth century Holland, sending prices of tulip

bulbs so high that people mortgaged their homes to buy them. Crashed in 1637.

South Sea Bubble Seized eighteenth century England when a craze for the worth-

less but attractive South Sea Company spilled into a mania for stocks. Peaked and

crashed in 1720. (The Mississippi Bubble inflamed France at the same time.)

It is not hard,

really, to make

money in

the market.

The indexing

strategy is the

one I most highly

recommend.




3/5


Roaring Twenties One of Americas most maniacal speculative episodes began

about 1923 and ended in the Crash of 1929, ushering in the Great Depression.

Soaring Sixties The 1960s saw the first big tech stock bubble as speculators

flocked to any issue with electronic in its name. The era also witnessed a specula-

tive infatuation with conglomerates and concept stocks with interesting stories. Nifty Fifty Some 50 big growth stocks (IBM, Xerox, Avon) captivated Wall

Street, which sent their P/E ratios into high double digits before the inevitable fall.

Roaring Eighties A new issue flurry in 1983 made the 1960s look tame. The

euphoria of the LBO boom and the biotech craze ended with the crash of 1987.

The Japan Bubble At one point in 1989, the real estate under the Imperial Palace

in Tokyo was worth more than all the land in California, and the Japanese stock

market was valued at 45% of the worlds market capitalization. Crash came in 1990.

Internet Bubble In the late 1990s, the NASDAQ Index, dominated by high-tech

companies, tripled and then some, before the crash.

A market bubble is like a Ponzi scheme. It prospers as long as new speculators are willing

to plow in cash, but fails when new cash stops flowing. The Internet boom of the 1990swas special, though, involving an almost unprecedented abandonment of rudimentary

investment rationality and a fairly substantial degree of corruption and conflict of inter-

est, especially by analysts. Wall Street once maintained Chinese Walls separating

analysts from brokers and investment bankers. Those walls turned porous during the

Internet bubble. Analysts often found that their jobs depended on giving shaky stocks

glowing recommendations. Why? Because their firms brokers or investment bankers

could make fortunes working for the analyzed company but companies hire firms that

recommend their stocks. Many Internet companies had no history or profits, and made no

sense as investments when evaluated with traditional metrics, so analysts invented new

metrics (i.e. measuring not sales but eyeballs, the number of people who looked at a

web page). The media fueled speculation by turning dot.com parvenus into stars. As for

investors, fraud aside, we should have known better.

Attention to history and fundamentals can help you avoid the popping bubbles massive

losses. Clearly investor passions play a role in stock prices, yet investing by the greater

fool theory is risky. If you buy an unsound stock intending to sell it to a greater fool, be

prepared to find that a greater fool than yourself may not come up the road any time soon.

Tools of the Crystal Ball

Professionals use certain tools, including technical and fundamental analysis, to try to

predict stock prices in the unknowable future. Technical analysts, or chartists, attempt to

divine stock price movement patterns by charting past stock prices. Philosophically, tech-

nicians fall into the castle-in-the-air camp, believing that crowd psychology determines

prices, and is both fairly repetitive and more or less predictable. Yet in fact, stock prices arerandom. If you flip a coin 100 times and chart the results, your chart will look very much

like a chart of stock prices. Coin flips are random, but if you chart them, you can get long

strings of heads or tails that look like long up or down market trends. Be particularly skep-

tical about these popular but worthless technical investing theories and indicators:

Filters The notion that any stock that moves some percentage up from a low or

down from a high is on a trend that will continue. Filter techniques dont beat a

simple buy-and-hold, when transaction expenses are factored in. (Brokers love them,

though, because they generate commissions.)

A biblical

proverb statesthat 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 October1987 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.




4/5


5/5


prices reflect most if not all the important information about a companys pros-

pects and the markets likely direction. The market reacts quickly to new data, the key

factor driving stock price moves. Even such great investors as Benjamin Graham, Warren

Buffett and Peter Lynch have said that the individuals do better buying index funds than

trying to pick stocks or invest with a stock-picking manager. The market is not perfectlyefficient. People do get caught up in manias. Information may not find its way into stock

prices as quickly as efficient-market theorists believe. But, overall, its very tough to beat

the market almost impossibly tough.

Yet some people get rich buying and selling stocks. What do they have that others lack?

They have risk. The only way to get high returns is to take high risk. An Ibbotson

Associates study shows that returns are highly correlated with risk, that is, variance in

returns. Common stocks are the highest-return asset class studied, and the highest risk.

Modern Portfolio Theory (MPT) says it is possible to spread your money over a portfolio

of risky securities in such a way that the portfolios overall risk is lower than the risk

of any one stock and still get good returns. Diversification offers the lowest level of risk

consistent with a given return.

Put your eggs in as many baskets as possible. An internationally diversified portfolio

is less risky than a purely U.S. portfolio. From 1970 to 2002, the highest return for

the lowest risk came with a portfolio with 24% non-U.S. and 76% U.S. stocks. The

benefits of international diversification are disappearing, with U.S. and developed non-

U.S. markets moving more and more in tandem. But currency differences and emerging

market changes can disrupt market correlations. Diversify not only across common

stocks, but also across asset classes. Two other asset classes worth considering are real

estate investment trusts (REITS) and government bonds. REITS let you buy stock in

real estate, which does not move in tandem with stock market. Inflation is the bane of

bond investors, so consider inflation-protected bonds (called TIPS). Tax law isnt kind to

them, so use them in tax-sheltered plans.

The best advice to help the individual investor succeed in the market is to diversify

and reduce costs, and not to try to outguess other investors about the future direction

of prices. Even pros fail at this strategy. Studies repeatedly prove that a passive inves-

tor who holds a diversified index does better than someone who invests in an actively

managed fund.

About The Author

Burton G. Malkiel holds the Chemical Bank Chairmans Professorship at Princeton

University. He is a former member of the Council of Economic Advisors and serves onthe boards of several major corporations, including the Vanguard Group of Investment

Companies and Prudential Financial Corporation.

Buzz-Words

Beta / Bubble / Diversification / Dow theory / Firm-foundation / Fundamental analysis /

Greater fool theory / January effect / Modern portfolio theory / Momentum investing /

Random walk / Efficient-market theory / Technical analysis

Can you

continue to expect

a free lunch frominternational

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 manag-

ers, they are very

rare, and there is

no way of telling

in advance whothey will be.


Documents

A Random Walk Down Wall Street Malkiel en 2834