Book Review: A Random Walk Down Wall Street by Burton G. Malkiel
Last fall I fulfilled one of my bucket list items and became an Adjunct Professor at Golden Gate University teaching the Personal Investment Management course. I’ve been asked if there is a textbook we use, and as part of the required reading, we use a book that originally came out in 1975! A Random Walk Down Wall Street by Burton G. Malkiel, a Princeton University economist, has been revised and updated and is now on its 13th edition which came out this year.
My class uses this book to understand the history of the markets and theories such as the efficient market hypothesis, capital assets market theory and fundamental and technical analysis. But while this is a must read for people in the financial industry, it is an excellent introduction for anyone who just wants to understand more about investing their own portfolio.
When Malkiel is describing “a random walk”, he is saying that the short-run changes in the market are unpredictable, so using chart patterns, earnings forecasts or using an investment advisor is useless. Analysis can’t help predict future stock prices. He states very simply that he believes that an investor would do much better buying and holding passive, low-cost, tax efficient, broad-based index funds instead of trying to beat the market trading individual stocks or actively managed funds.
If you’re just learning about investments, be sure to check out Part Four, A Practical Guide for Random Walkers and Other Investors. This is where it goes into real financial advice as well as explanations on asset allocation, diversification and risk tolerance.
There is a significant focus on the relationship between risk and reward, and the importance of deciding upon the degree of risk you’re willing to take. Malkiel uses the Sleeping Scale of Major Investments outlining which investments might be most suitable, requiring each investor to understand the trade off between eating well or sleeping well. This balance between high returns and peace of mind is a choice only you, the investor, can make.
This book does not have get-rich-quick investment strategies, but it is a great guide which can make you a wiser investor, and hopefully make good investment decisions.