Document www.trading-software-collection.com [email protected], Skype: iii.gonch file:///E|/Unposted/Netlib/A%20Random%20Walk%20Down%...047814/nlReader.dll@BookID=32673&FileName=Cover.html [10/7/2007 12:41:52 AM] Document Page 3 A Random Walk Down Wall Street Including A Life-Cycle Guide To Personal Investing Burton G. Malkiel Chemical Bank Chairman's Professor of Economics At Princeton University www.trading-software-collection.com [email protected], Skype: iii.gonch file:///E|/Unposted/Netlib/A%20Random%20Walk%20Down%...0393047814/nlReader.dll@BookID=32673&FileName=3.html [10/7/2007 12:41:53 AM] Document Page 4 Copyright © 1999, 1996, 1990, 1985, 1981, 1975, 1973 by W. W. Norton & Company, Inc. All rights reserved Printed in the United States of America The text of this book is composed in Zapf Elliptical with the display set in Berling. Desktop composition by Justine Burkat Trubey Manufacturing by the Haddon Craftsmen, Inc. Library of Congress Cataloging-in-Publication Data Malkiel, Burton G. A random walk down Wall Street : including a life-cycle guide to personal investing / Burton G. Malkiel. p. cm. Rev. ed. of: a random walk down Wall Street. c1996. Includes bibliographical references and index. ISBN 0-393-04781-4 1. Investments. 2. Stocks. 3. Random walks (Mathematics) I. Malkiel, Burton G. Random walk down Wall Street. II. Title. HG4521 .M284 1999 332.6dc21 98-50671 CIP W. W. Norton & Company, Inc., 500 Fifth Avenue, New York, N.Y. 10110 http://www.wwnorton.com W. W. Norton & Company Ltd., 10 Coptic Street, London WC1A 1PU 2 3 4 5 6 7 8 9 0 www.trading-software-collection.com [email protected], Skype: iii.gonch file:///E|/Unposted/Netlib/A%20Random%20Walk%20Down%...0393047814/nlReader.dll@BookID=32673&FileName=4.html [10/7/2007 12:41:53 AM] Document Page 5 To Nancy www.trading-software-collection.com [email protected], Skype: iii.gonch file:///E|/Unposted/Netlib/A%20Random%20Walk%20Down%...0393047814/nlReader.dll@BookID=32673&FileName=5.html [10/7/2007 12:41:54 AM] Document Page 7 CONTENTS Preface 13 Acknowledgments from Earlier 17 Editions Part One Stocks and Their Value 1. Firm Foundations and Castles in the 23 Air What Is a Random 24 Walk? Investing as a Way of Life 26 Today Investing in 28 Theory The Firm-Foundation 29 Theory The Castle-in-the-Air Theory 31 How the Random Walk Is to Be 33 Conducted 2. The Madness of 35 Crowds The Tulip-Bulb 36 Craze www.trading-software-collection.com [email protected], Skype: iii.gonch file:///E|/Unposted/Netlib/A%20Random%20Walk%20Do...3047814/nlReader.dll@BookID=32673&FileName=7.html (1 of 3) [10/7/2007 12:41:54 AM] Document The South Sea 39 Bubble The Florida Real Estate 45 Craze Wall Street Lays an 46 Egg An 53 Afterword 3. Stock Valuation from the Sixties through the 55 Nineties The Sanity of 55 Institutions The Soaring 57 Sixties The New "New Era": The Growth-Stock/New-Issue 57 Craze Synergy Generates Energy: The Conglomerate 61 Boom Performance Comes to the Market: The Bubble in Concept 69 Stocks The Sour 73 Seventies The Nifty 73 Fifty The Roaring 76 Eighties www.trading-software-collection.com [email protected], Skype: iii.gonch file:///E|/Unposted/Netlib/A%20Random%20Walk%20Do...3047814/nlReader.dll@BookID=32673&FileName=7.html (2 of 3) [10/7/2007 12:41:54 AM] Document The Triumphant Return of New 76 Issues Concepts Conquer Again: The Biotechnology 78 Bubble www.trading-software-collection.com [email protected], Skype: iii.gonch file:///E|/Unposted/Netlib/A%20Random%20Walk%20Do...3047814/nlReader.dll@BookID=32673&FileName=7.html (3 of 3) [10/7/2007 12:41:54 AM] Document Page 8 The Chinese Romance with the Lycoris Plant 80 Some Other Bubbles of the 81 1980s What Does It All 85 Mean? The Nervy 85 Nineties The Japanese Yen for Land and 85 Stocks The Internet Craze of the Late 90 1990s A Final 94 Word 4. The Firm-Foundation Theory of Stock 95 Prices The "Fundamental" Determinants of Stock 96 Prices Two Important 103 Caveats Testing the 106 Rules One More 108 Caveat What's Left of the Firm 111 Foundation? www.trading-software-collection.com [email protected], Skype: iii.gonch file:///E|/Unposted/Netlib/A%20Random%20Walk%20Do...3047814/nlReader.dll@BookID=32673&FileName=8.html (1 of 3) [10/7/2007 12:41:55 AM] Document Part Two How the Pros Play the Biggest Game in Town 5. Technical and Fundamental 117 Analysis Technical versus Fundamental 118 Analysis What Can Charts Tell 119 You? The Rationale for the Charting 124 Method Why Might Charting Fail to 126 Work? From Chartist to 127 Technician The Technique of Fundamental 128 Analysis Why Might Fundamental Analysis Fail to 132 Work? Using Fundamental and Technical Analysis 134 Together 6. Technical Analysis and the Random-Walk 138 Theory Holes in Their Shoes and Ambiguity in Their 138 Forecasts Is There Momentum in the Stock 140 Market? www.trading-software-collection.com [email protected], Skype: iii.gonch file:///E|/Unposted/Netlib/A%20Random%20Walk%20Do...3047814/nlReader.dll@BookID=32673&FileName=8.html (2 of 3) [10/7/2007 12:41:55 AM] Document Just What Exactly Is a Random 142 Walk? Some More Elaborate Technical 145 Systems The Filter 146 System The Dow 146 Theory The Relative-Strength 147 System Price-Volume 148 Systems Reading Chart 148 Patterns Randomness Is Hard to 149 Accept A Gaggle of Other Technical Theories to Help You Lose 150 Money www.trading-software-collection.com [email protected], Skype: iii.gonch file:///E|/Unposted/Netlib/A%20Random%20Walk%20Do...3047814/nlReader.dll@BookID=32673&FileName=8.html (3 of 3) [10/7/2007 12:41:55 AM] Document Page 9 The Hemline Indicator 151 The Super Bowl Indicator 153 The Odd-Lot Theory 153 A Few More Systems 155 Technical Market Gurus 155 Why Are Technicians Still Hired? 159 Appraising the Counterattack 160 Implications for Investors 163 7. How Good Is Fundamental Analysis? 165 The Views from Wall Street and Academia 166 Are Security Analysts Fundamentally Clairvoyant? 166 Why the Crystal Ball Is Clouded 170 1. The Influence of Random Events 171 2. The Creation of Dubious Reported Earnings through "Creative" 172 Accounting Procedures 3. The Basic Incompetence of Many of the Analysts Themselves 174 4. The Loss of the Best Analysts to the Sales Desk or to Portfolio 177 Management www.trading-software-collection.com [email protected], Skype: iii.gonch file:///E|/Unposted/Netlib/A%20Random%20Walk%20Do...3047814/nlReader.dll@BookID=32673&FileName=9.html (1 of 2) [10/7/2007 12:41:56 AM] Document Do Security Analysts Pick Winners? The Performance of the Mutual Funds 178 Can Any Fundamental System Pick Winners? 186 The Verdict on Market Timing 187 The Semi-strong and Strong Forms of the Random-Walk Theory 190 The Middle of the Road: A Personal 193 Viewpoint Part Three The New Investment Technology 8. A New Walking Shoe: Modern Portfolio Theory 199 The Role of Risk 200 Defining Risk: The Dispersion of Returns 201 Exhibit 201 Expected Return and Variance: Measures of Reward and Risk 201 Documenting Risk: A Long-Run Study 204 Reducing Risk: Modern Portfolio Theory (MPT) 206 Diversification in Practice 211 9. Reaping Reward by Increasing Risk 220 Beta and Systematic Risk 221 www.trading-software-collection.com [email protected], Skype: iii.gonch file:///E|/Unposted/Netlib/A%20Random%20Walk%20Do...3047814/nlReader.dll@BookID=32673&FileName=9.html (2 of 2) [10/7/2007 12:41:56 AM] Document Page 10 The Capital-Asset Pricing Model (CAPM) 224 Let's Look at the 229 Record An Appraisal of the 232 Evidence The Quant Quest for Better Measures of Risk: Arbitrage Pricing 234 Theory A Summing 237 Up 10. The Assault on the Random-Walk Theory: Is the Market Predictable after 240 All? Predictable Patterns in the Behavior of Stock 242 Prices 1. Stocks Do Sometimes Get on One-Way Streets 243 2. But Eventually Stock Prices Do Change Direction and Hence 244 Stockholder Returns Tend to Reverse Themselves 3. Stocks Are Subject to Seasonal Moodiness, Especially at the Beginning 247 of the Year and the End of the Week Predictable Relationships between Certain "Fundamental" Variables and Future 249 Stock Prices 1. Smaller Is Often Better 249 2. Stocks with Low Price-Earnings Multiples Outperform Those with High 251 Multiples www.trading-software-collection.com [email protected], Skype: iii.gonch file:///E|/Unposted/Netlib/A%20Random%20Walk%20Do...047814/nlReader.dll@BookID=32673&FileName=10.html (1 of 3) [10/7/2007 12:41:56 AM] Document 3. Stocks that Sell at Low Multiples of Their Book Values Tend to Produce 253 Higher Subsequent Returns 4. Higher Initial Dividends and Lower Price-Earnings Multiples Have 254 Meant Higher Subsequent Returns 5. The "Dogs of the Dow" Strategy 258 And the Winner 259 Is . The Performance of Professional 259 Investors Concluding 267 Comments Appendix: The Market Crash of October 270 1987 Part Four A Practical Guide for Random Walkers and Other Investors 11. A Fitness Manual for Random 277 Walkers Exercise 1: Cover Thyself with 278 Protection Exercise 2: Know Your Investment 281 Objectives Exercise 3: Dodge Uncle Sam Whenever You 289 Can Pension Plans and 289 IRAs www.trading-software-collection.com [email protected], Skype: iii.gonch file:///E|/Unposted/Netlib/A%20Random%20Walk%20Do...047814/nlReader.dll@BookID=32673&FileName=10.html (2 of 3) [10/7/2007 12:41:56 AM] Document Keogh 290 Plans Roth 293 IRAs www.trading-software-collection.com [email protected], Skype: iii.gonch file:///E|/Unposted/Netlib/A%20Random%20Walk%20Do...047814/nlReader.dll@BookID=32673&FileName=10.html (3 of 3) [10/7/2007 12:41:56 AM] Document Page 11 Tax-Deferred 294 Annuities