Alright, I’ve gone through the text, and I want to give my opinion on the information contained in “A Random Walk Down Wall Street”. There are some things that the author, Burton G. Malkiel does very right, one of those being that he draws a distinction between speculating on stocks and investing. To me, that is the most important thing to understand about stocks. That they represent value, not just numbers on a paper somewhere.
To give you some background, the book is discussing something called the Efficient Portfolio Theory, which sort of extends the microeconomic idea that markets are self regulating and efficiently priced. Sometimes prices rise very high above intrinsic values, and sometimes they’re depressed far below, but over time the market tends to correct those prices, so the author tries to convince you that beating the market is hard, and it’s a better idea to invest in index funds rather than individual stocks. Warren Buffett is the absolute antithesis of the Efficient Portfolio theory, and he has been critical of it on numerous occasions.
An odd thing about this book, is that in the opening chapter Malkiel describes why the market is efficient, then spends about 100 pages talking about why the investors participating in it are irrational. It was long-winded and redundant. At the very end of this argument, he states Benjamin Graham’s famous line from “The Intelligent Investor” that the market is a voting machine in the short term, but a weighing machine in the long term. In that statement alone he’s pretty much saying that the market misprices stocks. Graham had it figured out nearly 40 years earlier though.
I think the author has put together a quality writing overall, he talks about many of the problems that exist in the brokerage world, and why Wall Street is more interested in collecting your trade fees than increasing your returns. The arguments being made about analyst’s faults apply more to why professional money managers have a harder time beating the market than the individual. What he fails to emphasize, is that the major reason the “professionals” fail is that they are too focused on the short term. I did appreciate that he talked about how technical analysis works and it’s faults. He briefly touches on the techniques of value investing, but then makes the mistake of applying those techniques to completely random stocks, which is not what the process is about.
In closing, I will say that Graham’s idea of buying from a business perspective, paying a price low enough to create a margin of safety, and then hedging in bonds to protect yourself further from the insanity of bull markets is much more effective. Graham knew that the markets behaved in odd ways, that investors were occasionally irrational, and he expected it to continue that way into the future. The idea being that the prepared investor can take advantage of a market that’s not efficiently priced. Three decades after his death, we can see that he is still right about these things. Real value investing is definitely more work than just buying a passive index, but the rewards are greater. If you haven’t read random walk, read Benjamin Graham first.
