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A Random Walk Down Wall Street

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A Random Walk Down Wall Street

The Time-Tested Strategy for Successful Investing

W.W. Norton,

15 min read
10 take-aways
Audio & text

What's inside?

When you wander Wall Street, watch out for stray theories and useless predictors. 

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Editorial Rating

9

Qualities

  • Analytical
  • Applicable
  • Background

Recommendation

The first edition of Burton Malkiel’s A Random Walk Down Wall Street appeared in 1973, a few years after the first big computer technology bubble, the go-go era, burst. This eighth edition appears after the popping of the dot.com bubble, the last of the 20th century’s great technology bubbles. Investors burned in the first bubble could have been excused; after all, they didn’t have Malkiel’s book. But it’s astounding how avidly Internet speculators threw aside all that Malkiel and others had taught them. This book belongs on every investor’s bookshelf and ought to be consulted – or at least touched to the forehead – before any investment decision. Most investment books aren’t trustworthy, because their authors are salespeople who are really making a pitch instead of trying to inform you. Malkiel is disinterested. He is a teacher with the intellectual discipline of a true financial economist, and yet he writes as vividly as a good journalist. getAbstract recommends this classic: All you need to know about the market is between its covers.

Summary

Take a “Random Walk”

When experts say that stock prices are a random walk, they mean that short-term price moves are unpredictable. This infuriates Wall Street professionals whose comfortable living often depends on people paying them for their supposedly superior knowledge of what the market is about to do.

But history is pretty clear. Investors who don’t try to profit by predicting market moves do better, by and large, than speculators who attempt to cash in on short-term predictions. Investing in investment theories doesn’t make a great deal more economic sense than that. Two of the most popular investment theories are:

  • Firm-foundation theory – Stocks have an “intrinsic value” that can be calculated by discounting and summing future dividend flows. Adherents to one or another form of this theory include economist Irving Fisher and investor Warren Buffett.
  • Castle-in-the-air theory – Also known as the greater fool theory, this postulates that successful investing is based on predicting the mood of the crowd. An investment will be worth whatever people are willing to pay, and people aren’t terribly rational.

About the Author

Burton G. Malkiel holds the Chemical Bank Chairman’s Professorship at Princeton University. He is a former member of the Council of Economic Advisors and serves on the boards of several major corporations, including the Vanguard Group of Investment Companies and Prudential Financial Corporation.

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