I felt a bit skeptical about this book when I first picked it up. After all, there is not much of a point to this blog if what Burton Malkiel describes is correct. But after finishing this investment classic, I have to admit that I am now convinced that Malkiel’s approach is the appropriate one for most investors. Still, I don’t plan on abandoning stock picking anytime soon, and I want to take this opportunity to lay out the strengths of Malkiel’s work and why I don’t feel compelled to cede control to an index fund.
First, a little background. The title of the pithily named A Random Walk down Wall Street: The Time-tested Strategy for Successful Investing refers to a theory in finance that stock price movements follow no pattern. The implication is that almost all strategies designed to outperform the market are useless, and investors are best served by sticking with index funds. The random walk theory is an offshoot of the efficient market hypothesis (EMH), which posits that asset prices reflect all known information. According to the EMH, it is impossible to beat the market consistently, and those who do so are merely incredibly lucky. The theory gained a lot of attention within academic economics during the 1970s, and many of its most prominent scholars went on to win Nobel Prizes.
It is from this theoretical milieu that “A Random Walk” springs forth to preach its advice to a lay audience. Malkiel begins by describing speculative bubbles since 1600 and running through the history of folly and stupidity in financial markets. He wastes no time in quickly striking down “technical” analysis, the Wall Street version of palm reading. When it comes to fundamental or value investing, Malkiel makes a convincing case that active investment management is usually futile. Towards the end of the book, Malkiel branches off into niche topics of personal finance and even touches on odder assets like collectibles.
Although high finance can be quite abstract, Malkiel does a fine job of writing for the layman. There is little math except for basic probability and statistics, and the book is packed with interest anecdotes and examples. Malkiel’s style is extremely accessible, even managing to inject a bit of dramatic flair into a normally dry subject. “A Random Walk” is relatively light reading, and I think even those unfamiliar with investing or finance can find something of value.
My only contention with this book is that I don’t think it adequately addresses why a certain class of investors, namely those following the “value investing” philosophy of Ben Graham, Phil Fisher, and others, have managed to outperform market averages over a significant period. Warren Buffett famously made this point in his essay “The Superinvestors of Graham-and-Doddsville.” To his credit, Malkiel grudgingly acknowledges that certain individuals such as Buffett have unusual ability. It would have been nice to see more discussion of when active investing is warranted, since Malkiel does concede that one shouldn’t keep walking when there is a hundred dollar bill lying in the street (to use his metaphor). Malkiel doesn’t have much to say about how to recognize these hundred dollar bills, perhaps out of fear that doing so will distract from his overall contention that active investing is usually doomed to failure.
Despite this shortcoming, Malkiel’s contention that the vast majority of investors should invest passively is quite rational. He earns some credibility by admitting that some active investing can be successful, so long as it is on the margin. The reader is treated to the unique perspective of a man who has been involved in both the business world and academia for many years. This is a book I recommend to others because of its excellent explanation on academic literature, well-written section on the history of speculative bubbles, and solid personal finance advice.
Rating: 4.5 out of 5