This is an investment book by Burton G. Malkiel. He is the Chemical Bank Chairman’s Professor of Economics at Princeton University. Now, you might think that how could a professor of economics give good advice regarding investment. If he is able to do well in the market, he would not be a professor, right? But what if I tell you his estimated net worth as of 21 May 2018 is at least $2.2 million (Link)? Will this change your mind?
I finished this book in a week’s time and I personally think that this book gives a lot of insight about investment.
Layout of A Random Walk Down Wall Street
First, the author discusses about the theories of investing, namely firm foundations and castles in the air. Then, he gives examples of previous bubbles, from the tulip bulb craze to the internet craze, covering a period of a few hundred years.
Then, he proceeds to discuss about technical and fundamental analyses. He also disproves a few investment systems that promise consistent returns.
After that, he introduces some investment technology, including modern portfolio theory, capital asset pricing model and arbitrage pricing theory.
In the final part of the book, he gives some guides for the common investors. I find that a Malaysian cannot apply most recommendations from this part. However, there are still lessons to be taken from his advice.
Lessons
First, let me explain what a random walk is. It is a term coined by mathematicians to mean a sequence of numbers produced by a random process. By using this term, the author suggests that the price movement of the stock market is completely unpredictable based on its history.
So, what did I learn from this book?
Before investing, we need to find out our risk tolerance and how much risk we can actually assume. Choose a risk level that will allow you to sleep well.
Holding period determines the risk of investments. According to the author, the risk decreases with longer holding period.
Logical and psychological factors determine market valuations. Styles and fashions affect the pricing of securities but ultimately the market corrects any irrationality.
Exceptional financial managers are very rare, if they do exist. Thus, it is better just to buy index fund. Nonetheless, this strategy is not really feasible in Malaysia.
Buy high quality stock with low price-to-earnings (P/E) ratio. If growth materializes, the investor will likely get a double benefit of increase in the earnings and the P/E ratio.
According to the author, the dividend yield at the time of purchase and the future growth rate of the dividends are two critical factors determining very long-run returns from common stocks.
An investor’s total return is determined by the asset categories that are selected and their overall proportional representation. Based on this insight, he prescribes a guide for every age range.
For the stock market as a whole, Newton’s law has always worked in reverse: what goes down must come back up. Nonetheless, this only applies to stock market as a whole, but not individual stock.
Luck does play a significant role in determining the returns of investment.
There are a lot more lessons that I have learnt but I only share what I feel are particularly important.
Conclusion
The author is a proponent of the efficient market hypothesis, but not a staunchest supporter. He recognizes that some inefficiencies can and do exist in the market and these can be exploited by investors.
Overall, this is an investment book full of practical advice. I strongly recommend that you read this as I feel that everyone can definitely learn a thing or two from this book.
I shall end with some quotes from the book:
“No price is too high for a bull or too low for a bear.”
“Not one industry is easy to predict.”
“True value will always out in the stock market.”
“Even if stock prices move randomly, you shouldn’t.”
“There is no sure and easy road to riches.”
“You must distinguish between your attitude toward and your capacity for risk.”
“Ultimately, it is really an art requiring a certain talent and the presence of a mysterious force called luck.”
Recommended book
If you are interested in A Random Walk Down Wall Street, you may get the book from Kinokuniya Malaysia through the link below*.
*Disclosure: The above link is Involve Asia affiliate link. Thus, I may earn a small commission when you purchase the book through this link.
