Taking another “random walk”
I recently had the chance to reread A Random Walk Down Wall Street by Burton Malkiel as part of a work-related book club.
Having read the book in a business school class very early in my career, I promptly ignored its advice and became a securities analyst (a profession about which he makes a few disparaging remarks!) charged with analyzing companies and making buy-and-sell recommendations. I was guilty of most of the shortcomings Dr. Malkiel points to (for example, trying to pick winners), but at least I got to visit an oil rig in the Gulf of Mexico. It took me a while to recognize the futility of my role, but I did eventually move on. Now I’m on the other side of my career. And in the rereading, I was struck by the book’s message in a way that escaped me the first time around.
While A Random Walk’s main premise is the difficulty investors have in outperforming the market, there are several other interesting aspects I think are worth mentioning. The first is that human nature doesn’t appear to change over time, nor do we learn from our mistakes. Malkiel devotes a fair amount of time documenting the various investment bubbles that have occurred through history, from the tulip bulb mania in Holland in the early 1600s to the dot-com obsession in the late ’90s. Although the current edition was completed in June 2006, the subsequent housing bubble and bust has given us another example of this behavior—and probably has Prof. Malkiel already thinking about penning an eighth edition.
On a related note, Malkiel addresses the behavioral component to our investment decisions and the role emotion can play. Overconfidence in our abilities as investors and the illusion of control where there is none are two examples.
Finally, Dr. Malkiel distills the book’s message into what is, for me, the essence of successful investing: the importance of broad diversification, the dominant role of investment costs in determining an investor’s success, and the importance of minimizing mistakes as a means of preserving wealth.
So, better late than never. I wonder what other books I should read again?
Note: All investing is subject to risk. Diversification does not ensure a profit or protect against a loss in a declining market.
In order to have an efficient market, SOMEBODY has to do security analysis. In exchange for providing valuable pricing information to the market, they are given the opportunity to benefit from the market price that they are helping to correct. So I wouldn’t regret your former life.
Vegas loves to see players with confidence they can beat the odds. Me, I go for the buffets.
How does high frequency trading bring anything good to the markets?
Well, if you haven’t read every line ever written by your founder, John Bogle get started. I assume you keep Benjamin Graham’s, “The Intelligent Investor” within an easy arm’s reach, right?
Instead of books to re-read [or for rookies to read for the first time!] here is my list of a couple
authors who write really well and can stand re-reading every decade – or every bubble – at the least:
Anything by
John Bogel
Charles Ellis [do not miss his anthologies of classic articles!]
Burton Malkiel
Wm. J. Bernstein
Peter L. Bernstein
Rick Ferri
Jason Zweig [do not miss his annotated/edited versions of Ben. Graham and Fred Schwed works!]
Both Jeremy Grantham and James Montier of GMO write well and regularly appearing commentaries.
I was extremely fortunate in the Fall of 2008 to be reading The Great Crash 1929 by John Kenneth Galbraith which really helped me “stay the course”!
I do agree with The random walk theory but at the same time when i look at the vanguard total market index for the last 10 years on Google finance being down 8.25% i think there is something to be said about having deep stop losses to protect yourself from black swan types of market corrections.
After retiring I read most of the books in the 332 section of the library and remember one cogent sentence about the S&P 500 being a Momentum Play, meaning a stock only gets there after a huge rise, the opposite of buying low. So I avoided malaise of 2000-10, and truly learned to love the crashes of 08-09. One other lesson from Steven Birmingham: rich people do not live on their stock market winnings, but on the interest from the interest. Take 6% of your investments and multiply that by 6%. If that amount doesn’t do it, you ain’t rich yet.
Thank you for sharing your story. It is very similar to the path I’ve taken as an individual investor after trying to gain an edge on the markets over the last 15 years. Now that I’ve arrived at the same conclusions you have, I’ve been wondering how I can help my children begin their investing careers without having to learn the same lessons the hard way. If they could avoid wasting time and money trying to beat the indexes they will be much more likely to reach their financial goals and enjoy their free time more.
I am now amazed at how government policy can shape our prosperity. I am not an economist, but I appears to me that the more money(property) the government confiscates for inefficient use, the less there is for prosperity created by private enterprise. Now we seem to be in a tail spin and I simply don’t see how we can get out of it without significant sacrifice. For most air craft you simply keep your hands off the controls when in an out of control tail spin, I wonder if the same principle is true with economics. would we have been better of today to let the “to big to fail” fail two years ago? I think we have people making decisions at high levels that have not clue as to what they are doing or what to do.
I am re-reading Milton Friedman’s book and realize that his projections of economics were in line with what is happening today’s. It’s scary to see how right his theory was. and what is more scary is that few are embracing the solutions that he put forward.
Two of my favorites:
1. Economics in One Lesson Henry Hazlitt
2. Common Sense on Mutual Funds John Bogle