A Random Walk Down Wall Street: The Time-Tested Strategy for Successful Investing

BlogJune 26, 2022

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A Random Walk on Wall Street has long been considered the first book to read when starting a portfolio.

In this classic investment book, Burton G. Malkiel shows individual investors key arguments and detailed instructions to confidently navigate their way in every market – and find their own. The surest way to preserve and rapidly increase your investment.

Introducing the book A Random Walk on Wall Street

Since it was first published in 1973, The Random Walk on Wall Street has helped put thousands of stock investors in the right direction.

This book is an excellent introduction to index investing by taking you through the stock market history, schools of thought, failed strategies, historical evidence of index investing, and applications. This book is for beginners and time-tested investors to re-evaluate their investment performance.

Malkiel’s central message is clear:

  • Start saving as soon as possible. Invest the core of your portfolio in low-cost, broad-based index funds.
  • Avoid actively managed funds with high fees. These funds are everywhere, and they consistently underperform index funds.

A random walk on Wall Street acts as a schedule that guides the reader into the financial maze of Wall Street. The place is full of complications, and no one has ever thought they could beat the “hard-headed” guys on Wall Street.

About the author Burton G. Malkiel

Burton Gordon Malkiel (born August 28, 1932) is an American economist and writer best known for his classic financial book A Random Walk on Wall Street (first published in 1973, reprinted many times). He is a leading proponent of the efficient market hypothesis, which holds that prices of publicly traded assets reflect all publicly available information. However, he has also shown that some markets are inefficient, with signs of non-randomness.

Malkiel is a professor of economics at Princeton University. He served as a member of the Council of Economic Advisers (1975–1977), president of the American Financial Association (1978), and dean of the Yale School of Management (1981–1988). Malkiel also spent 28 years as a director of Vanguard Group. He is currently the Chief Investment Officer of a software-based financial advisor, Wealthfront Inc., And he is a member of the Investment Advisory Board for Rebalance.

Author Burton G. Malkiel

Quotes from the book A Random Walk on Wall Street

Please quote some of the book’s content so that you can decide whether to invest your time in this book.

Why do you need to invest?

If we want to deal with mild inflation, we must implement investment strategies to maintain our real purchasing power. Otherwise, we have to endure a decreasing standard of living.

If inflation is 5% per year, you need to recover at least 5% to maintain your real purchasing power. If you leave money in an interest-free account, your money will become less valuable.

Money saved after more than ten years becomes depreciated, and purchasing power decreases. Poor people who do not know how to invest will become poorer.

Rule 72

A helpful rule, known as the “rule of 72”, is the formula for determining how long it takes money to double. Take the interest you earn and divide it by 72. We get the number of years it takes to double your money.

For example, if the interest rate is 15%, it will take almost five years for your money to double (72:15 = 4.8 years). If the interest rate is 10%, it will take more than seven years to double the amount (72:10 = 7.2 years).

4% rule

When you retire, the cost of living should be no more than 4% of the annual investment. In most cases, spending 4% per year will allow you to have enough money until you die. 

Reader reviews of the book

The author’s book is about financial markets in the US but can still be applied in other markets. The book has been reprinted many times, and the author has updated it with new information.

The book also received rave reviews from readers. See reviews from people who have read this book.

Review of Aquinas: An eye-opening book

I read this book many years ago in an edition. It’s an eye-opener. It taught me how the stock market works and showed me the best strategy for the average investor to accumulate a retirement nest egg. After reading Malkiel, I moved most of my savings to inexpensive index funds. As a result, I started to hold more money and worry less about what the market was doing on any given day. I’m nearing retirement now, and thanks to the advice of Malkiel (and other like-minded personal finance writers, such as John Bogle, Charles Ellis, and Daniel Solin), I’ve amassed enough savings to go to work. Into investment. I wish I had seen this book sooner.

Review of BLS: A broad overview of investing that dives too deep for a straightforward message

Burton Malkiel gives a comprehensive overview of how our stock markets are structured, how they work, and how we interact with them. It includes a history lesson on bubbles, booms, busts, recessions, and rallies from the Tulip craze to the present day. 

Malkiel covers everything from stocks to bonds to mutual funds and more. 

There are chapters on charting, modern portfolio theory, and CAPM. Although this book is intended as an overview, there is a lot of information here. The text reads like a university professor trying to give a fascinating lecture or presentation. I find some chapters, like the history of market movements, interesting because I like history in general – the whole how and why of events and their effect on how we get to the day. I also enjoyed the chapters on investment behavior and psychology. Like charts, betas, and government-backed bonds, other branches don’t appeal to me much. The information is sometimes overly technical and sounds like a mess to me or doesn’t apply to my investment strategy.

The content of the book is summarized into five main ideas.

  • First, the market is irrational and unpredictable. Don’t try too hard to get through it, or the time is right. Stock prices skyrocket and fall, and random world events like terrorist attacks or government scandals and unwarranted revelation or pessimism are too much for anyone or anyone to do. You will not win. You can get lucky and think you have won, but you can quickly lose. Hence the random walk.
  • Second, despite all of the above, investing in the stock market still beats any other investment in the long run. Buy, hold, add and repeat. Don’t fall prey to the jitters or whims and wits of “professional” investors with messages of doom and gloom. As Warren Buffett said,
  • Three, picking a winning stock is not easy. You are a young investor with a small sum like $5k. How would you invest it? Do you feel confident picking a stock or two? Does your selection beat the market average? It is possible if you choose the right one under the right conditions. However, the best way to invest in the markets is through an index fund that reflects the market you want to invest in. compared with the standard. SPY will follow S&P, DIA will follow Dow Jones, and QQQ will follow Nasdaq 100. So why risk picking one or two stocks when you can have them all?
  • Four, diversify your diversification. Index funds diversify your money among many securities. You can go further and diversify by investing in international funds. The idea is that some international funds may outperform US funds. They can also “zig” when the US sponsors “zag.”
  • Five, and finally, bypass the services of a professional advisor. He’s not a genie or sorcerer. You can do as well as he can, if not better.

I agree with 1, 2, and 5 above, but I disagree slightly with 3 and 4.

  • Regarding 3, you must open any index funds. You see precisely what it is holding and how much. 

For example, if you want to know what SOXX is having, then go to the iShares website and look at it. All are there. Instead of buying SOXX, I could bypass the middleman’s approximately 0.5% fee and buy only those securities or at least the top 10. Many brokers, like Fidelity, offer fractional trading down to 0.001 shares as long as the resulting purchase price is at least $0.01. Now that means you have to do some work and learn how to track stocks. At least you have a starting point.

You may find yourself with a large sum, such as 100,000usd or more. With money like that, you can build an extreme version of your index fund equivalent with 20 to 80 stocks.

Now, I will dispute myself and repeat what I said above. It will involve quite a bit of work over a long period. 

You have companies to track and all that. It can become a second job. In that case, maybe a simple all-in-one index fund is all you need.

  • Regarding point 4, I think you should use some advanced charting tool or total return calculator available from your broker or online to compare how US stocks perform compared to international stores. Compare some of the best US funds like QQQ, SPY, SOXX, and IGV with country-specific funds focusing on New Zealand, China, and Russia. If you find these international funds outperform their US counterparts, you have a starting point for an international diversification case. I don’t see it. I see US-centric ETFs and equities outperforming most international funds. Diversification here makes no sense. Why would I split my money between two markets, one that can grow >8% per year for ten years and one that can increase by ~4% per year for ten years? I poured everything I could into the highest performing instrument available. After a few years, if something better comes along, I divest one and buy the other. Or, even better, buy more of a stock that is depressed, knowing it will recover.

So even though I can’t entirely agree with everything Malkiel said, it sparked a lot of thoughts in my head, so I give it five stars.

Conclusion

A book published in 1973 and republished and updated often shows its attraction to readers and individual investors. Malkiel repeats the mantra of investing in low-cost, broad-based indexes over and over again convincingly but also clearly explains many other investment options with their advantages and disadvantages. The humor and brevity of the writing, coupled with the rich information, make this book enjoyable to read.

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