A Random Walk Down Wall Street: The Time-Tested Strategy for Successful Investing
By Burton Gordon Malkiel
Money Lying on the Ground and an Ape Throwing Darts: two stories in A Random Walk Down Wall Street strike me the most. First, if you are walking on the street and see a $100 bill lying on the ground, you should not pick it up. Second, a blindfolded ape throwing darts at a newspapers financial pages could select a portfolio that would do just as well as one carefully selected by experts. And these two stories illustrate the main point of the book: the stock market is efficient and no one can earn above-average returns without accepting above-average risks. Therefore, an average person who invests in index funds can even do better than a professional who actively manages a fund. Besides this thesis, the book also introduces some investment vehicles and strategies. The question is: should I recommend this book as an introduction book to an intelligent friend with no investment experience?
The answer to this question depends on what my friend’s situation is. Specifically, it would concern my friend’s intended length of investment, market she chooses to invest in and her purpose of investing. In the following, I will mainly talk about situations where I won’t recommend the book to my friend. The book’s Efficient Market Hypothesis might not work well if my friend wants to invest short-term. If she sees a $100 bill on the street, why wouldn’t she pick it up just because it should or will disappear eventually? (The EMH says that the bill should or will disappear.) In other words, if my friend wants to invest in the short-term, why would she refuse to grab the short-term benefits just because it will disappear in the long run? Say that if my friend needs to send her children to college in four years, she can only invest the inheritance for the next four years. She might be better off by investing in an actively management fund. She probably will get much money by buying some tech stocks in 1995 and selling them in 1999, even though the internet bubble busted later on. If one is investing in a short period of time, the book’s theory will not necessarily apply since the thesis is based on long term. In this case, I won’t recommend the book to my friend. Instead, she will benefit more from a book that introduces different strategies on how to select stocks or fund managers.
The place the ape (average investor) is at also matters. "King Kong was a king and a god in the world he knew, but now he comes to civilization merely a captive", says Carl Denham in King Kong. Index funds might not outperform the actively managed ones at certain places. For example, if my friend is in China, she might be better off by hiring a good manager to manage her funds because the Chinese stock market is highly speculative and relatively opaque. According to the China Securities Regulatory Commission, as high as 65% to 70% of the investors in the Chinese stock market consists of private individuals. Partly because individuals tend to aim at the short-term rather than the long term compared to institutions, the Chinese stock market can swing dramatically and easily go out of norm. In the book, the market always adjusts itself to normal state. However, if abnormality is the rule, rather than the exception, like the Chinese stock market, the abnormal state becomes the new norm. Since it would be difficult to tell when the market will correct itself, one can do better by just following the trends or the new norm. Moreover, information from the public companies is not highly transparent, which prevents the market from performing efficiently. Since the Efficient Market Hypothesis is a condition for the superiority of index funds over actively managed funds, sticking with index funds, as promoted by the book, might not work well. Sometimes, the big mutual fund management companies have insider information that helps them take advantage of market inefficiencies and perform better than the index funds. (Note that the Chinese law system is not mature enough to prevent that from happening.) In fact, a recent research on S and P has shown that in some areas, stock picking outperforms passive investing. For example, more than half of actively managed large- and small-cap value funds beat the benchmarks in the past five-year period. Actively managed large-cap value funds did particularly well, returning 2.2% per year on average, versus 0.63% for the index; actively managed small value funds earned 3.79% per year, versus 2.96% for the index. The average actively managed international small-cap fund returned 4.91% per year over the last five years, more than triple the index. Index funds might be the King and God of stock market in some areas, but merely a captive to actively managed funds in other areas.
Moreover, the purpose of investing matters. If my friend is on the street to appreciate the spectacular architectures, a $100 bill lying on the ground will not be appealing to her. If my friend wants to invest to have fun, she would not derive much pleasure from just passively investing in index funds. Rather, I would recommend some other book that goes into the details of how to pick stocks to her. In another case, if my friend is investing to learn about companies or behavior of equities, she would not learn much with index funds. On the other hand, if my friend just wants to get rich slowly, the book by Malkiel is the right one. Lastly, you never know if your friend will be the next Warren Buffet. It is always worth a try. If I recommend the random walk book to my friend up front, she might become a passive investor and just give up picking her stocks and developing her own investment strategies.
A potential Warren Buffet might just get covered up in the mascot of a blindfolded ap.
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Editorial Staff
Monday, December 12, 2011
Sunday, December 11, 2011
M&A Activity Review
SAP Moves to Acquire Success Factors
Success Factors is a Web-based software company and is valued around $40 a share. This move by SAP comes in response to rival Oracle’s acquisition of RightNow Technologies for $1.43 billion this past October. This move highlights the purchase of smaller software companies as larger companies look to compete in cloud technology.
Buffet to Buy Omaha Newspaper
Warren Buffet looks to by the publisher of the Nebraska principal daily newspaper. Berkshire Hathaway reportedly is buying Buffet’s hometown newspaper. Terms of the deal have not been revealed, but this marks an interesting buy of the Omaha World -- Herald company.
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Editorial Staff
Success Factors is a Web-based software company and is valued around $40 a share. This move by SAP comes in response to rival Oracle’s acquisition of RightNow Technologies for $1.43 billion this past October. This move highlights the purchase of smaller software companies as larger companies look to compete in cloud technology.
Buffet to Buy Omaha Newspaper
Warren Buffet looks to by the publisher of the Nebraska principal daily newspaper. Berkshire Hathaway reportedly is buying Buffet’s hometown newspaper. Terms of the deal have not been revealed, but this marks an interesting buy of the Omaha World -- Herald company.
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Editorial Staff
Monday, December 5, 2011
Market Recap (Dec. 5)
The Dow Jones Industrial Average (DJIA) finished the week up 7% despite a late downturn as the market closed on Friday. This marks the second biggest weekly gain in the index’s history. The S&P 500 and the Nasdaq Composite finished the week up 7.4% and 7.6% respectively. Investors responded positively to reports early in the week that unemployment had fallen to 8.6% and that 120,000 nonfarm jobs were created in the month of November. This is a broad indicator that the US’ ailing economy is improving, but analysts are quick to caution that we are not out of the woods yet.
There are still major concerns looming over the European debt crisis and although domestic manufacturing is on the rise, the interdependencies in world economies could create serious problems as Europe slides into a recession. The leaders of the 17-nation Euro zone will meet for a summit on Thursday and Friday of this upcoming week and investors will continue to follow measures to ease the debt crisis closely.
The European Central Bank (ECB) recently pledged 200 billion euros to the International Monetary Fund to be used in alleviating the fiscal woes of countries such as Italy, Greece, and Spain. Oil finished the week at over $100/barrel and energy stocks performed extremely well on the whole. This sector is awaiting a final decision on a proposal from TransCanada (TRP) to build a pipeline from Canada to the Gulf of Mexico. While the Obama administration has initially rejected the idea over concerns about safety and the environmental impact the pipeline may have, House Republicans have introduced a bill to legislatively force approval. Proponents of the project say the pipeline would create 20,000 jobs and release problematic oil gluts in places like Cushing, OK.
Financial stocks posted huge gains as three out of four companies listed on the DJIA ended with positive numbers for the week. European banks benefited from Angela Merkel’s comments early in the week on plans to reach a tighter fiscal union in the EU. American bank shares responded well to the positive labor reports but, like every other sector of the economy, are still extremely vulnerable to economic unrest in Europe.
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Editorial Staff
There are still major concerns looming over the European debt crisis and although domestic manufacturing is on the rise, the interdependencies in world economies could create serious problems as Europe slides into a recession. The leaders of the 17-nation Euro zone will meet for a summit on Thursday and Friday of this upcoming week and investors will continue to follow measures to ease the debt crisis closely.
The European Central Bank (ECB) recently pledged 200 billion euros to the International Monetary Fund to be used in alleviating the fiscal woes of countries such as Italy, Greece, and Spain. Oil finished the week at over $100/barrel and energy stocks performed extremely well on the whole. This sector is awaiting a final decision on a proposal from TransCanada (TRP) to build a pipeline from Canada to the Gulf of Mexico. While the Obama administration has initially rejected the idea over concerns about safety and the environmental impact the pipeline may have, House Republicans have introduced a bill to legislatively force approval. Proponents of the project say the pipeline would create 20,000 jobs and release problematic oil gluts in places like Cushing, OK.
Financial stocks posted huge gains as three out of four companies listed on the DJIA ended with positive numbers for the week. European banks benefited from Angela Merkel’s comments early in the week on plans to reach a tighter fiscal union in the EU. American bank shares responded well to the positive labor reports but, like every other sector of the economy, are still extremely vulnerable to economic unrest in Europe.
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Editorial Staff
Friday, December 2, 2011
Interview with P&G CEO Bob McDonald
The CEO of P & G talks about his global career experience, P & G's expansionary strategies and offer career advice for college students.
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Editorial Staff
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Editorial Staff
Occupy Wall Street: Where Is It Headed?
As the Occupy Wall Street movement continues to sweep the nation, and the 99% continue to cry for accountability and justice within the financial system -- we should take heed in not only their movement, but also the glaring reality that the group is fighting a battle they simply cannot win. For despite the growing number of Occupy groups that have sprung up across the nation (both on and off college campuses) -- these protesters face a discouragingly long uphill battle. Starting with the negative media surrounding the group’s often fragmented goals, and ending with a financial situation that is often too complicated to explain to the average American -- OWS was doomed from the start. The blame the group seeks falls to no one individual, nor can the economies downturn be traced to one specific event. Beyond the desperate cries for Wall Street executives to be held accountable for what they have done -- what the movement has failed to realize is that they are not protesting the greed and corruption of the financial system, but those of American society. The full-bodied, drastic changes OWS wish to see implemented would only come only at the cost of broad-spectrum changes to American consumer culture and massive disruptions to the American economy.
Without even taking a stance on the movement, it is easy to see that the group’s vision completely outdistances the realities of our current situation. There is no doubt that the glaring disparities in wealth, education and living standards need to be addressed within our society -- but protesting the men and women who have the means and the ability to keep themselves in the 1% is not the best way to get there. To attack the principals of capitalism -- the foundation upon which this nation was built -- is but to alienate yourself to a position where you can no longer create the meaningful change you wish to create.
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Editorial Staff
Without even taking a stance on the movement, it is easy to see that the group’s vision completely outdistances the realities of our current situation. There is no doubt that the glaring disparities in wealth, education and living standards need to be addressed within our society -- but protesting the men and women who have the means and the ability to keep themselves in the 1% is not the best way to get there. To attack the principals of capitalism -- the foundation upon which this nation was built -- is but to alienate yourself to a position where you can no longer create the meaningful change you wish to create.
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Editorial Staff
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