Last Updated on 18 January 2021 by F.R.Costa

First published in 1973, Malkiel’s top selling book is still a must read for investors. While very well documented with empirical evidence, the book uses a simple language and logic which allows everyone to be able to understand it without any need for advanced technical knowledge.

Due to the challenging stock market that goes through many ups and downs, Malkiel has reviewed his original book several times. But the reason was not because the book had become outdated but rather to add further evidence showing the market is difficult to predict, that it follows a random walk.

Burton Gordon Malkiel is a Princeton economist that advocates the efficient market hypothesis (EMH). He recognises that investors may be influenced by sentiment at times but he believes that these biases don’t follow a predictable pattern. Through a detailed analysis, Malkiel points out that empirical evidence has been recurrently showing that fundamental and technical analysis aren’t much valuable for investors. They can safely disregard it and improve their returns by investing in a costless broad-market index fund instead of handpicking stocks or trying to time the market.

Investors are often seduced by optimist promises of above average returns and eye-candy chart patterns but even the most prosperous actively-managed funds have struggled to beat the market in a consistent way over long periods of time. Many of these funds tend to reverse to the mean performance following their success and it is impossible for an investor to choose the outperformers based on past performance. Handpicking stocks is also inefficient as no one knows which company will be the next Enron. Besides, Modern Portfolio Theory has taught an important lesson regarding risk and reward. The best investment portfolio is always the broad market. The final decision, which takes into account individual preferences regarding risk and reward will just select how much of this market portfolio will mix with cash (or riskless bonds).

Malkiel believes that, if there’s a pattern coming from technical analysis that is of use today then it will turn useless tomorrow as more and more people explores it. Technical analysts often find excuses for their failures.

If you commit the social error of asking him why he is broke, he will tell you quite ingenuously that he made the all-too-human error of not believing his own charts

But the problem is not only about the chart patterns, but also about fundamental analysis and its forecasts.

Financial forecasting appears to be a science that makes astrology look respectable.

The influence of random events, the production of dubious reported profits through creative accounting procedures, errors made by analysts themselves and conflicts of interest facing securities analysts at firms with large investment banking operations all contribute to turn stock analysis into a parascience.

Malkiel believes that most investors should concentrate in keeping a diversified portfolio and start saving as soon as possible. The cheaper way of doing this is by using passive investment techniques, investing in cheap funds that hold a broad selection of assets. Sooner in life investors should hold a portfolio with 70% of stocks or more, as there is enough time to surpass any market downturn and recover potential losses. Later in life, the portfolio should concentrate its holdings in bonds, which have a much lower volatility and then insure investors against any sudden equity downturn.

I am not an efficient market hypothesis (EMH) advocate. There are reasons explaining why investors decisions are often biased and why professional investors do not oppose these biases and help guide the market toward an efficient outcome. We often assist to prolonged periods of irrational behaviour that keep stock prices distorted. Momentum itself has been often cited as a factor explaining returns, even though there’s no good reason to be paid above the market return for holding past outperformers. However, even when the EMH doesn’t hold, investors may be better off by investing in broad index funds, as it is often difficult to beat the market, in particular from the perspective of a common individual just trying to save some funds for his retirement.

A Random Walk Down Wall Street isn’t a get rich fast kind of book but rather a well-written book from a respectable scientist. It’s a much read for everyone in finance and for investment enthusiasts.

A Random Walk Down Wall Street was first published in 1973. The book is now on its 12th edition. Here are some details about the digital version of the book (from Amazon.com):

  • File Size : 20,747 KB
  • Publication Date : January 1, 2019
  • Print Length : 430 pages
  • Word Wise : Enabled
  • Publisher : W. W. Norton & Company
  • Language: English
  • Text-to-Speech : Enabled
  • Enhanced Typesetting : Enabled
  • ASIN : B07DP6YGVX
  • X-Ray : Not Enabled

About F.R.Costa

Filipe has more than 20 years experience with financial markets. He holds a degree in Economics with a specialisation in Finance and he's currently finishing a PhD in Finance. He used to work as financial consultant and research associate but then decided to return to academia five years ago. Since that, he has been an Invited Lecturer, teaching courses on Investments, Financial Markets, and Monetary Economics. He is also a regular contributor writer at The Master Investor Magazine.

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