A Random Walk Down Wall Street

A Random Walk Down Wall Street The Time-Tested Strategy for Successful Investing by Burton G. Malkiel W.W. Norton © 2003 414 pages Focus Take-Aways Leadership • It is not all that diffi cult to make money in the stock market. Strategy Sales & Marketing • It is hard to resist the emotional pull of a possible windfall. Corporate Finance Human Resources • Investors often ignore the lessons of fi nancial history. Technology Production & Logistics • Ultimately, the market fi nds true value or something close to it. Small Business • In the long term, a stock can’t be worth more than the cash it brings to investors. Economics & Politics Industries & Regions • Investors should take advantage of tax-favored savings and investment plans. Career Development Personal Finance • The best investment strategy is probably indexing. Self Improvement • Most so-called market anomalies (January effect, etc.) aren’t really playable. Ideas & Trends • Never pay more for a stock than it’s really worth. • The market is, for all practical purposes, unpredictable, but investors do better than speculators over the long haul. Rating (10 is best) Overall Applicability Innovation Style 9 10 9 8 To purchase individual Abstracts, personal subscriptions or corporate solutions, visit our Web site at www.getAbstract.com or call us at our U.S. offi ce (954-359-4070) or Switzerland office (+41-41-367-5151). getAbstract is an Internet-based knowledge rating service and publisher of book Abstracts. getAbstract maintains complete editorial responsibility for all parts of this Abstract. The respective copyrights of authors and publishers are acknowledged. All rights reserved. No part of this abstract may be reproduced or transmitted in any form or by any means, electronic, photocopying, or otherwise, without prior written permission of getAbstract Ltd (Switzerland). Relevance What You Will Learn In this Abstract, you will learn the facts of investing life, without a sales pitch to distort the information. Recommendation The fi rst edition of Bernard Malkiel’s A Random Walk Down Wall Street appeared in 1973, a few years after the twentieth century’s fi rst big computer technology bubble, the go-go era, popped. This, the newest and eighth edition, appears after the popping of the dot.com bubble, the last of the twentieth century’s great computer technology bubbles. Investors burned in the fi rst 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 fi nancial economist, and yet he writes as vividly as a good journalist. getAbstract.com recommends this classic: all you need to know about the market is between its covers. Abstract Defi ne a “Random Walk” When we say that stock prices are a “random walk” we 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 profi t by “It is not hard, really, to make predicting market moves do better, by and large, than speculators who attempt to cash money in the in on short term predictions. Investing in investment theories doesn’t make a great deal market.” 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 fl ows. 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 very rational. Ample evidence indicates that the market behaves irrationally, sometimes setting prices way above realistic values, sometimes dragging them far below. Predicting this “The indexing irrationality is quite diffi cult, and profi ting from it is even harder. History’s most famous strategy is the one market manias include: I most highly recommend.” • Tulipmania — Gripped early seventeenth century Holland, sending prices of tulip bulbs so high that people mortgaged their homes to buy them. Crashed in 1637. • South Sea Bubble — Seized eighteenth century England when a craze for the worthless but attractive South Sea Company spilled into a mania for stocks. Peaked and crashed in 1720. (The Mississippi Bubble infl amed France at the same time.) A Random Walk Down Wall Street © Copyright 2003 getAbstract 2 of 5 • Roaring Twenties — One of America’s most maniacal speculative episodes began about 1923 and ended in the Crash of 1929, ushering in the Great Depression. “A biblical proverb • Soaring Sixties — The 1960’s saw the fi rst big tech stock bubble as speculators states that ‘in the fl ocked to any issue with “electronic” in its name. The era also witnessed a specula- multitude of coun- tive infatuation with conglomerates and “concept stocks” with interesting stories. selors there is safety.’ The same • Nifty Fifty — Some 50 big growth stocks (IBM, Xerox, Avon) captivated Wall can be said of Street, which sent their P/E ratios into high double digits before the inevitable fall. investment.” • Roaring Eighties — A new issue fl urry in 1983 made the 1960’s look tame. The euphoria of the LBO boom and the biotech craze ended with the crash of 1987. • The Japan Bubble — At one point in 1989, the real estate under the Imperial Palace in Tokyo was worth more than all the land in California, and the Japanese stock market was valued at 45% of the world’s market capitalization. Crash came in 1990. • Internet Bubble — In the late 1990’s, the NASDAQ Index, dominated by high-tech companies, tripled and then some, before the crash. “Of course, earn- A market bubble is like a Ponzi scheme. It prospers as long as new speculators are ings and dividends infl uence market willing to plow in cash, but fails when new cash stops fl owing. The Internet boom prices, and so of the 1990s was special, though, involving an almost unprecedented abandonment of does the temper of rudimentary investment rationality and a fairly substantial degree of corruption and the crowd.” confl ict of interest, especially by analysts. Wall Street once maintained “Chinese Walls” separating analysts from brokers and investment bankers. Those walls turned porous during the Internet bubble. Analysts often found that their jobs depended on giving shaky stocks glowing recommendations. Why? Because their fi rms’ brokers or investment bankers could make fortunes working for the analyzed company — but companies hire fi rms that recommend their stocks. Many Internet companies had no history or profi ts, and made no sense as investments when evaluated with traditional metrics, so analysts “Although stock invented new metrics (i.e. measuring not sales but “eyeballs,” the number of people who prices do plummet, looked at a web page). The media fueled speculation by turning dot.com parvenus into as they did so stars. As for investors, “fraud aside, we should have known better.” disastrously during October 1987 and again during the Attention to history and fundamentals can help you avoid the popping bubbles’ massive early 2000s, the losses. Clearly investor passions play a role in stock prices, yet investing by the “greater overall return fool” theory is risky. If you buy an unsound stock intending to sell it to a greater fool, be during the entire prepared to fi nd that a greater fool than yourself may not come up the road any time soon. twentieth century was about 9% per year, including Tools of the Crystal Ball both dividends and Professionals use certain tools, including technical and fundamental analysis, to try to capital gains.” predict stock prices in the unknowable future. Technical analysts, or “chartists,” attempt to divine stock price movement patterns by charting past stock prices. Philosophically, technicians fall into the castle-in-the-air camp, believing that crowd psychology determines prices, and is both fairly repetitive and more or less predictable. Yet in fact, stock prices are random. If you fl ip a coin 100 times and chart the results, your chart will look very much like a chart of stock prices. Coin fl ips are random, but if you chart them, you can get long strings of heads or tails that look like long up or down market trends. Be particularly “As long as there are stock markets skeptical about these popular but worthless technical investing theories and indicators: there will be mistakes made by • Filters — The notion that any stock that moves some percentage up from a low or the collective judg- down from a high is on a ‘trend’ that will continue. Filter techniques don’t beat a ment of investors.” simple buy-and-hold, when transaction expenses are factored in. (Brokers love them, though, because they generate commissions.) A Random Walk Down Wall Street © Copyright 2003 getAbstract 3 of 5 • Dow theory — Advises buying when the market surpasses its last peak and selling when it goes below the previous low. Tests prove this is a money-losing strategy. “Nevertheless, one • Relative strength — Buy stocks that outperform the market and sell stocks that has to be im- under-perform.

Load more