9780393062458

A Random Walk Down Wall Street The Time-Tested Strategy for Successful Investing

by
  • ISBN13:

    9780393062458

  • ISBN10:

    0393062457

  • Edition: 9th
  • Format: Hardcover
  • Copyright: 2007-01-17
  • Publisher: W. W. Norton & Company

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Summary

Updated with a new chapter that draws on behavioral finance, the field that studies the psychology of investment decisions, here is the best-selling, authoritative, and gimmick-free guide to investing. Burton Malkiel evaluates the full range of investment opportunities, from stocks, bonds, and money markets to real estate investment trusts and insurance, home ownership, and tangible assets such as gold and collectibles. This edition includes new strategies for rearranging your portfolio for retirement, along with the book's classic life-cycle guide to investing, which matches the needs of investors in any age bracket. A Random Walk Down Wall Street long ago established itself as a must-read, the first book to purchase before starting a portfolio. So whether you want to brief yourself on the ways of the market before talking to a broker or follow Malkiel's easy steps to managing your own portfolio, this book remains the best investing guide money can buy.

Table of Contents

Preface 15
Acknowledgments from Earlier Editions 19
PART ONE STOCKS AND THEIR VALUE
1. Firm Foundations and Castles in the Air
23
What Is a Random Walk?
24
Investing as a Way of Life Today
26
Investing in Theory
28
The Firm-Foundation Theory
28
The Castle-in-the-Air Theory
30
How the Random Walk Is to Be Conducted
33
2. The Madness of Crowds
34
The Tulip-Bulb Craze
35
The South Sea Bubble
38
Wall Street Lays an Egg
44
Afterword
51
3. Stock Valuation from the Sixties through the Nineties
52
The Sanity of Institutions
52
The Soaring Sixties
53
The New "New Era": The Growth-Stock/New-Issue Craze
53
Synergy Generates Energy: The Conglomerate Boom
56
Performance Comes to the Market: The Bubble in Concept Stocks
63
The Sour Seventies
66
The Nifty Fifty
66
The Roaring Eighties
68
The Triumphant Return of New Issues
68
Concepts Conquer Again: The Biotechnology Bubble
70
ZZZZ Best Bubble of All
71
What Does It All Mean?
73
The Nervy Nineties
74
The Japanese Yen for Land and Stocks
74
4. The Biggest Bubble of All: Surfing on the Internet
78
How Bubbles Arise
78
A Broad-Scale High-Tech Bubble
80
An Unprecedented New-Issue Craze
82
TheGlobe.com
84
Security Analysts $peak Up
86
New Valuation Metrics
87
The Writes of the Media
89
Fraud Slithers In and Strangles the Market
92
Should We Have Known the Dangers?
94
A Final Word
96
PART Two How THE PROS PLAY THE BIGGEST GAME IN TOWN
5. Technical and Fundamental Analysis
99
Technical versus Fundamental Analysis
100
What Can Charts Tell You?
102
The Rationale for the Charting Method
105
Why Might Charting Fail to Work?
107
From Chartist to Technician
108
The Technique of Fundamental Analysis
109
Three Important Caveats
117
Why Might Fundamental Analysis Fail to Work?
120
Using Fundamental and Technical Analysis Together
121
6. Technical Analysis and the Random-Walk Theory
126
Holes in Their Shoes and Ambiguity in Their Forecasts
126
Is There Momentum in the Stock Market?
128
Just What Exactly Is a Random Walk?
129
Some More Elaborate Technical Systems
133
The Filter System
133
The Dow Theory
134
The Relative-Strength System
134
Pike-Volume Systems
135
Reading Chart Patterns
135
Randomness Is Hard to Accept
136
A Gaggle of Other Technical Theories to Help You Lose Money
138
The Hemline Indicator
138
Me Super Bowl Indicator
140
The Odd-Lot Theory
140
A Few More Systems
141
Technical Market Gurus
142
Why Are Technicians Still Hired?
144
Appraising the Counterattack
145
Implications for Investors
148
7. How Good Is Fundamental Analysis?
150
The Views from Wall Street and Academia
151
Are Security Analysts Fundamentally Clairvoyant?
152
Why the Crystal Ball Is Clouded
155
1. The Influence of Random Events
156
2. The Production of Dubious Reported Earnings through "Creative" Accounting Procedures
156
3. The Basic Incompetence of Many of the Analysts Themselves
159
4. The Loss of the Best Analysts to the Sales Desk, to Portfolio Management, or to Hedge Funds
160
5. The Conflicts of Interest between Research and Investment Banking Departments
161
Do Security Analysts Pick Winners?—The Performance of the Mutual Funds
164
Can Any Fundamental System Pick Winners?
170
The Verdict on Market Timing
171
The Semi-strong and Strong Forms of the Efficient-Market Theory
172
The Middle of the Road: A Personal Viewpoint
174
PART THREE THE NEW INVESTMENT TECHNOLOGY
8. A New Walking Shoe: Modern Portfolio Theory
179
The Role of Risk
180
Defining Risk: The Dispersion of Returns
181
Illustration: Expected Return and Variance Measures of Reward and Risk
181
Documenting Risk: A Long-Run Study
184
Reducing Risk: Modern Portfolio Theory (MPT)
186
Diversification in Practice
190
9. Reaping Reward by Increasing Risk
197
Beta and Systematic Risk
198
The Capital-Asset Pricing Model (CAPM)
201
Let's Look at the Record
206
An Appraisal of the Evidence
209
The Quant Quest for Better Measures of Risk: Arbitrage Pricing Theory
211
A Summing Up
214
10. Behavioral Finance
216
The Irrational Behavior of Individual Investors
219
Overconfidence
219
Biased Judgments
222
Herding
225
Loss Aversion
229
The Limits to Arbitrage
233
What Are the Lessons for Investors from Behavioral Finance?
237
1. Avoid Herd Behavior
238
2. Avoid Overtrading
240
3. If You Do Trade: Sell Losers, Not Winners
241
4. Other Stupid investor Tricks
242
Does Behavioral Finance Teach Ways to Beat the Market?
243
11. Potshots at the Efficient-Market Theory and Why They Miss
244
What Do We Mean by Saying Markets Are Efficient?
246
Potshots That Completely Miss the Target
247
Dogs of the Dow
247
January Effect
248
"Thank God It's Monday Afternoon" Pattern
249
Hot News Response
249
Why the Aim Is So Bad
250
Potshots That Get Close but Still Miss the Target
251
The Trend Is Your Friend (Otherwise Known as Short-Term Momentum)
251
The Dividend Jackpot Approach
253
The Initial P/E Predictor
255
The "Back We Go Again" Strategy (Otherwise Known as Long-Run Return Reversals)
256
"Smaller Is Better" Effect
259
The "Value Will Win" Record
261
Stocks with Low Price-Earnings Multiples Outperform Those with High Multiples
262
Stocks That Sell at Low Multiples of Their Book Values Tend to Produce Higher Subsequent Returns
263
But Does "Value" Really Trump Growth on a Consistent Basis?
264
Why Even Close Shots Miss
265
And the Winner Is...
267
The Performance of Professional Investors
267
Summing Up
271
PART FOUR A PRACTICAL GUIDE FOR RANDOM WALKERS AND OTHER INVESTORS
12. A Fitness Manual for Random Walkers
277
Exercise 1: Gather the Necessary Supplies
278
Exercise 2: Don't Be Caught Empty-Handed: Cover Yourself with Cash Resources and Insurance
280
Cash Reserves
280
Insurance
280
Deferred Variable Annuities
282
Exercise 3: Be Competitive—Let the Yield on Your Cash Reserve Keep Pace with Inflation
283
Money-Market Mutual Funds
283
Bunk Certificates of Deposit (CDs)
283
Internet Banks
284
Treasury Bills
285
Tax-Exempt Money-Market Funds
285
Exercise 4: Learn How to Dodge the Tax Collector
286
Individual Retirement Accounts
286
Both IRAs
288
Pension Plans
289
Saving for College: As Easy as 529
290
Exercise 5: Make Sure the Shoe Fits: Understand Your Investment Objectives
291
Exercise 6: Begin Your Walk at Your Own Home—Renting Leads to Flabby Investment Muscles
298
Exercise 7: Investigate a Promenade through Bond Country
300
Zero-Coupon Bonds Can Generate Large Future Returns
301
No-Load Bond Funds Are Appropriate Vehicles for Individual Investors
302
Tax-Exempt Bonds Are Useful for High-Bracket Investors
302
Hot TIPS: Inflation-Indexed Bonds
304
Should You Be a Bond-Market Junkie?
305
Exercise 8: Tiptoe through the Fields of Gold, Collectibles, and Other Investments
306
Exercise 9: Remember That Commission Costs Are Not Random; Some Are Cheaper than Others
308
Exercise 10: Avoid Sinkholes and Stumbling Blocks: Diversify Your Investment Steps
309
A Final Checkup
310
13. Handicapping the Financial Race: A Primer in Understanding and Projecting Returns from Stocks and Bonds
312
What Determines the Returns from Stocks and Bonds?
312
Three Eras of Financial Market Returns
316
Era I: The Age of Comfort
317
Era The Age of Angst
319
Era III: The Age of Exuberance
323
The Age of the Millennium
325
14. A Life-Cycle Guide to Investing
329
Five Asset-Allocation Principles
330
1. Risk and Reward Are Related
330
2. Your Actual Risk in Stock and Bond Investing Depends on the Length of Time You Hold Your Investment
331
3. Dollar-Cost Averaging Can Reduce the Risks of Investing in Stocks and Bonds
334
4. Rebalancing Can Reduce Investment Risk and Possibly Increase Returns
338
5. Distinguishing between Your Attitude toward and Your Capacity for Risk
340
Three Guidelines to Tailoring a Life-Cycle Investment Plan
342
1. Specific Needs Require Dedicated Specific Assets
342
2. Recognize Your Tolerance for Risk
343
3. Persistent Saving in Regular Amounts, No Matter How Small, Pays Off
343
The Life-Cycle Investment Guide
345
Life-Cycle Funds
348
Investment Management Once You Have Retired
349
Inadequate Preparation for Retirement
349
Investing a Retirement Nest Egg
350
Annuities
351
The Do-It-Yourself Method
354
15. Three Giant Steps Down Wall Street
357
No-Brainer Step: Investing in Index Funds
358
The Index-Fund Solution: A Summary
360
A Broader Definition of Indexing
363
A Specific Index-Fund Portfolio
366
ETFs and the Tax-Managed Index Fund
367
The Do-It-Yourself Step: Potentially Useful Stock-Picking Rules
369
Rule 1: Confine stock purchases to companies that appear able to sustain above-average earnings growth for at least five years
370
Rule 2: Never pay more for a stock than can reasonably be justified by a firm foundation of value
370
Rule 3: It helps to buy stocks with the kinds of stories of anticipated growth on which investors can build castles in the air
371
Rule 4: Trade as little as possible
372
The Substitute-Player Step: Hiring a Professional Wall Street Walker
373
The Morningstar Mutual-Fund Information Service
375
A Primer on Mutual-Fund Costs
376
Loading Fees
377
Expense Charges
377
Turnover Costs
378
The 50-50 Rule
379
The Malkiel Step
379
A Paradox
383
Some Last Reflections on Our Walk
384
A Random Walker's Address Book and Reference Guide to Mutual Funds
387
Index 397

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