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

by Malkiel, Burton G.

• ISBN13: 9780393062458
• ISBN10: 0393062457
• Edition: 9th
• Format: Hardcover
• Copyright: 2007-01-17
• Publisher: W. W. Norton & Company

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