A Random Walk Down Wall Street, Completely Revised and Updated Edition

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 SandP 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.

While I support the view that fundamental and technical analysis generally offer very little in the way of helpful advice, I believe that Malkiels 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 Malkiels "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 Malkiels 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).

Professor Malkiel, like so many other writers on the topic of investing, resorts to the use of ridiculous statements to support an argument for whatever investment is being peddled to a largely unsuspecting public.

Now, take a minute and examine Professor Malkielfs ridiculous statement. First, in 1969, the ability to invest in an SandP Stock Index Fund did not exist for the average small investor! Mr. John Bogle, Professor Malkielfs bosom buddy (and fellow Princetonian), did not offer the index fund concept to the average individual investor until 1973 abouts. Second, given that the advice in this book is slanted towards an audience that is primarily female and in their twenties or early thirties, offering an example of an investment strategy that quite honestly the reader would have had to take advantage of well before the time she was born seems a bit pointless. Third, upon closer inspection of this statement, how would choosing any other year besides 1969, say any other year after 1969, affect the comparison? The more astute among us know that changing the base (either the starting point or the ending point), changes the result. Finally, yes indeed, hindsight is 20/20 as always, and I have to ask, does the Good Professor really think history will repeat itself in exactly the same way?

That said, the bookfs message is not new or original, and simply states that by buying and holding an index fund (or a basket of such funds), investors would not only outperform most of the actively managed mutual funds, they would also avoid expensive transaction costs which eat away at returns. Besides being fundamentally obvious, this approach was first alluded to by Benjamin Graham and David Dodd in their books Security Analysis and the Intelligent Investor. Although the method Professor Malkiel advocates would appear to consign the investor to mediocre returns, what it actually does is turn the small investor into an ill-informed buyer.

Professor Malkielfs eadvicef boils down to the following: buy everything that is available, spread your money thin and far and wide, follow the crowd (as opposed to anticipating the crowd), never sell, and keep buying, no matter whatc In essence, after 382 pages of somewhat droll, uninspired, and often painful prose, I learned that I should buy a little of everything, cross my fingers, and hope to God that something that I bought goes up.

The motivation for this book rests on many faulty assumptions. Professor Malkiel incorrectly assumes that, like most small investors, the informed and intelligent reader will not, after digesting his treatise (or is it screed?), go out and do his or her homework and investigate the claims made in this book. He also assumes that most readers, particularly women, are mystified to the point of stupefaction by the investment scene. Basically, Professor Malkiel believes that every small investor is a stupid know-nothing easily awed by the slick Wall Street Players, and can not possibly hope to out-think and out-perform The Crowd or The Street, and thus should gleefully hand over his retirement funds to the more knowledgeable fund managers at the likes of Vanguard and Fidelity, who we all know have every small investorfs best interest at heart.

I also discovered numerous factual errata throughout the text, such as Professor Malkiel describing the infamous John Law of The Mississippi Scheme fiasco as an Englishman (he was in fact actually a Scotsman). In addition, I found the sexual allusions he liberally sprinkles throughout the text to be very off-putting and thoroughly inappropriate for both the topic and the target audience.

And yet, in spite of the many demerits of the text, it has two good points. The first is its adequate treatment of treatment of risk and reward, and second, it does address, albeit in a cursory fashion, all the varied classes of investment, from hard assets like gold, real estate and collectibles, to paper assets such as cash equivalents, stocks and bonds, giving some of the merits and demerits of each.

In sum, this book is a watered down version of John Boglefs Common Sense on Mutual Funds, and I personally regard the Index Fund Strategy as being analogous to the Shotgun Approach to Investing. As such, those individuals seeking to adopt the index approach or that have adopted the index approach to investing should read this book to keep the faith.