The Time-Tested Strategy for Successful Investing (10th Edition)

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About The Author

Burton Gordon Malkiel, an American economist and author, was born on August 28, 1932, and is well known for his classic financial book A Random Walk Down Wall Street. He is a major proponent of the efficient-market theory, which states that the prices of publicly traded assets represent all publicly accessible information, however he has also noted that some markets are clearly inefficient, displaying non-random walk indications.He believes that buying and holding index funds is the most efficient portfolio-management technique, but that active management “around the margins” of such a portfolio is possible since financial markets are not completely efficient. He is a two-time chairman of Princeton University’s economics department and the Chemical Bank chairman’s professor of economics. Malkiel was a member of the Council of Economic Advisers (1975–1977), the American Finance Association’s president (1978), and the Yale School of Management’s dean (1981–1988). He also worked with the Vanguard Group for 28 years as a director. He is the Chief Investment Officer at Wealth Front Inc., a software-based financial advisor, and a member of the Rebalance IRA Investment Advisory Board. (Also check out our: Online Shop)

He graduated from Boston Latin School in 1949 and went on to Harvard University, where he earned a bachelor’s degree in 1953 and an MBA in 1955. He began his career in business, but his interest in academic economics grew over time, and he finally obtained his PhD from Princeton University in 1964. In 1954, he married Judith Atherton Malkiel, and they had a son named Jonathan. Burton Malkiel married Nancy Weiss in 1988 after the loss of his first wife, Judith Malkiel, in 1987. From 1955 until 1958, he was a first lieutenant in the United States Army. He also sits on the advisory board of Research Affiliates, Robert D. Arnott’s investment management business. (You can also read about: The Forex Trading Game Is Riged, Banks Are Doing Collusions Against The Small Trader)

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About The Book

A Chance Departure The firm foundation idea and the “castle in the air” thesis are two key investing beliefs that Wall Street defines first. The firm basis theory essentially states that you should invest based on the actual genuine worth of what you’re investing in; for example, if you buy Coca-Cola stock, you should do so based on the company’s value. The “castle in the air” idea simply states that you should invest in reaction to what the crowds are doing, and that you may earn more money by riding the waves of individuals who are either following trends or attempting to invest on a solid basis. What is the correct answer? They are, in fact, both, but at separate times. (You can also read about: Warren Buffett)

It examines financial “crazes” throughout history. In all three cases (tulipomania, the South Sea bubble, and the 1929 Wall Street crisis), a market exploded until everything was overpriced, and then values quickly reverted to normal. Prices in all three cases returned to approximately the same value a year or two after the frenzy ended; within a year or two after the conclusion of the craze, prices had returned to roughly the same value as they were before the great run-up.

Following this core notion of market efficiency, Malkiel examines the two most popular types of Wall Street analysis: technical analysis and fundamental analysis. Technical analysis is the study of market price behavior, typically utilizing complicated charts and trend lines to predict future performance. Fundamental analysis, on the other hand, is concerned with examining a company’s health by scrutinizing its financial statements, market, and rivals. This chapter mostly serves as a detailed introduction to both, though it’s already clear that Malkiel has somewhat more respect for fundamental analysis than technical analysis. This chapter primarily provides as a comprehensive introduction to both, however it’s apparent that Malkiel values basic analysis above technical analysis.

Finally, A Random Walk Down Wall Street offers some more precise investing advice. In a nutshell, invest in an index fund if you don’t have time to monitor your investments. If you want to chase individual stocks, keep your trading to a minimum, only buy stocks with realistic numbers, and seek for ones with compelling tales that can be used to create the “castles in the sky” discussed in the first chapter. What about managed funds and other alternatives? He either says no or says yes with a lot of qualifiers. (You can also read about: XM Trading Review)

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What You Can Learn From The Book

A Random Walk Down Wall Street is a must-read for anybody interested in how the stock market operates. It takes a hard look at what the majority of people say about the stock market – and why a lot of it is potentially false. If you adopt that perspective of the world, it also gives you advice on how to invest. (You can also read about: Ava Trader Review)

Of course, there are several alternative viewpoints on the market, and the reality is that individuals may profit from the stock market, but doing so involves a great deal of effort, which most people cannot afford (or even for most investment professionals). While I recommend purchasing this book, I would also suggest matching it with a good book on individual stock trading to gain a different viewpoint. This book is jam-packed with information on how the stock market — or any market for that matter – operates. The majority of A Random Walk Down Wall Street concentrates on various methods of analyzing the market to discover an advantage – and finds that they are mostly useless; near the end of the book, the lessons learnt are applied to investing in general. If you’re serious about investing, you won’t go wrong with this book. (You can also read about: Warren Buffett’s 3 Favorite Books)

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Readers Experience

Review By Tod N:

From talking to friends and reading an internal financial mailing list at work I got the vague impression that this book was somehow too esoteric or controversial to bother with. I am very glad that I decided to read this book. (You can also read about: Elon Musk)

It’s hard to work in Silicon Valley without being affected by Wall Street. When I started working I was interested in technology, not business and finance. Business and finance seemed a bit beneath me.

Eventually I got to a point where I had to deal with stock options, employee stock purchase programs, lock out periods, etc. My approach to learning about this was similar to my approach to learning about technology: trial and error. Sadly this was an expensive way to learn. I have learned some definite lessons about how the stock market works, but at the cost of more money than I thought I would ever have — let alone lose.

That’s why I would recommend this book to anyone who is planning to retire one day (i.e. everyone), especially people in their twenties with a vaguely technical bent. There is enough math and logic to make it interesting combined with enough plain prose and logical advice to make it important reading.

If you aren’t going to read it, I will summarize it here: save early and regularly, put the savings in index funds, try not to die. You can safely take out 4.5% of principal, so work backwards from that to figure out how and when to retire.

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Review By Sue:

We live in an age when most people have to control their own retirement destiny by making decisions about 401(k), 403(b), and IRAs. Even people with the most modest incomes are encouraged to confront that reality.

Malkiel’s approach is excellent for most of us who are not into stock analysis. He gets high marks for a couple of things: (1) He proposed a market index fund before such a thing even existed. (2) He has revised his book eleven times. In other words he has some street cred. Wall Street cred. I read this because Jack Bogle (of Vanguard fame) recommends it as the best book to read on the subject of investment. And the real point of reading it – I wanted to see what Malkiel’s update had to say about my retirement funds in the current economic environment. 

At times I wondered who Malkiel was directing the  Random Walk Down Wall Street at. Some of his advice is remarkably simplistic, the kind of advice only a newbie would need. (Buy a house. Keep cash in an emergency fund.) But then section three is wonky, and he could not resist digging into the research that informs his decisions. For two-thirds of the book, I found this dichotomy annoying. Economists may like section three, but they won’t much care about section four, when the hand-holding begins.

You may or may not care about the arguments over “efficient markets.” Malkiel is generally a believer but acknowledges dissenting views. Read it or not. If you’re here because you are looking for a rationale for a portfolio – one you can manage yourself – hang in there and read on.

Essentially, his advice is classic for our times: build a diversified portfolio of index funds (some small caps, large caps, international, emerging economies, REITs, and bonds). If possible, start early and keep as much as you can in tax-sheltered accounts. He does not recommend buying a stock index fund and nothing else. The comments on diversifying are important.

Not a radical approach. He does feel that in the middle of this decade we live in an environment that is not likely to offer large returns. So his asset allocation recommendations are the meat of his 2015 advice. Many readers may want to zoom right in on those later chapters. He has comments on the amount of risk appropriate to various situations. You won’t get rich quick following his advice, but you probably knew that. But you’ll probably face retirement with a tidy sum and a stable financial life. (Also check out our: Online Shop)

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