With all the talk of cryptocurrencies and driverless cars, we’re at a point in time where there is plenty to look forward to and lots be excited about. Technological progress not only impacts our day-to-day lives, but our financial lives as well as those advancements provide investors with opportunities to capitalize financially on growth spurred by innovative companies.
Despite all the hype, many investors approach technological advancement with a healthy dose of skepticism. There’s always the fear that the bubble is about to burst. This raises questions such as:
Is investor enthusiasm commensurate with the impact these new products might have on the market? and Is all this excitement causing us to ignore fundamental investing principles?
A Random Walk Down Wall Street helps answer these types of questions.
About the Author
Burton Malkiel is an American economist and writer best known for authoring A Random Walk Down Wall Street. Malkiel also spent nearly 30 years as the director of The Vanguard Group and served as Wealthfront’s Chief Investment Officer. Like Vanguard, Malkiel believes in market efficiency and establishing one’s core investments with diverse buy-and-hold strategies even when volatility is at its peak.
A Brief Summary
Investors have been determined to beat the market for as long as the market has been in existence. And as long as there are trading fees, the broker industry will continue to perpetuate the notion that you can beat the market with their assistance. Despite years of efforts though, no one has ever achieved more consistent and dependable results than the buy-and-hold strategy.
Malkiel explains that wise investors have solidarity and security in their life. They’ve planned for life’s events and this helps them avoid financial emergencies that often cause others to sell off investment to meet life’s demands. For the most part, these folks are not concerned with “castles in the air,” but instead investment in no-load mutual funds. While Malkiel does not reprimand investors for making riskier satellite investments, he contends that our goal should be to trade as little as possible.
Once you’ve established yourself as a low-cost, diverse investor, Malkiel preaches a few more vital commandments. The first is increasing the real estate allocation in your portfolio. Though he contends that homeownership is a huge positive, Malkiel implores readers to invite more REITs into their portfolio.
As much as Malkiel enjoys REITs, he equally dislikes investments in precious metals or collectibles. If you buy these things, do not treat them as investments. Instead, consider them consumer artifacts that make you happy to own. If we are generally willing to buy and sit on all-in-one mutual funds with the majority of our money, we will likely flourish. But even with this strategy, Malkiel teaches us that we can bolster certain sectors within our portfolio that can give us a boost to a highly stable portfolio.
Explaining Malkiel’s Terminology
A Random Walk Down Wall Street unwraps an age-old dichotomy in investment theory. Malkiel defines two basic investment ideologies:
The firm-foundation theory. This theory focuses on an investment’s intrinsic value. The actual value of an investment is based upon an analysis of present conditions + known future prospects. Buying opportunities are therefore established when a price moves below the correspondence of its intrinsic value.
The castle-in-the-air theory. This theory concentrates on psychic values. Rather than analyzing intrinsic factors, investors who apply this theory will make speculate investments based on trends and what the crowds are doing. Malkiel suggests that having an understanding of what leads to the build-up of “castles-in-the-air” can give investors opportunities to strike before a movement reaches its peak.
A Random Walk Down Wall Street objectively analyzes two of the more prominent approaches to investing. Readers will come away with an understanding of the pros and cons of incorporating factual data-driven analysis into their investment decisions or relying upon more of an emotion-based process. Ultimately, however, neither of these methods will ever satisfy the wise investor as long as no-load mutual funds are available.
Finally, Malkiel impresses upon readers that no one can reliably predict short-term market movements. Long-term movements, on the other hand, are far more predictable. Therefore, Malkiel theorizes that investors should apply a long-term approach to investing since that strategy has proven successful over the years.
A Random Walk Down Wall Street gets a sterling 4 1/2 stars from me! This book gives readers a macro-level view of investing while also getting down to the brass tacks of making trades. The near-comprehensive discussion of investing strategies touches on vital concepts and has something to offer any reader who’s interested in investing.
I only have one minor critique. The book can be highly technical at times. Indeed, Malkiel does spend considerable time explaining the X’s and O’s of investment research. I can see why some readers might not care for that level of detail. If you happen to be one of those types, you might prefer Unshakeable by Tony Robbins. It discusses similar concepts without the deep dive into natty gritty investing.