A Random Walk Down Wall Street
|Publisher||W. W. Norton & Company, Inc.|
|LC Class||HG4521 .M284 2007|
A Random Walk Down Wall Street, written by Burton Gordon Malkiel, a Princeton economist, is an influential book on the subject of stock markets which popularized the random walk hypothesis. Malkiel argues that asset prices typically exhibit signs of random walk and that one cannot consistently outperform market averages. The book is frequently cited by those in favor of the efficient-market hypothesis. As of 2012, there have been eleven editions and over 1.5 million copies sold. A practical popularization is The Random Walk Guide to Investing: Ten Rules for Financial Success.
Malkiel examines some popular investing techniques, including technical analysis and fundamental analysis, in light of academic research studies of these methods. Through detailed analysis, he notes significant flaws in both techniques, concluding that, for most investors, following these methods will produce inferior results compared to passive strategies.
Malkiel has a similar critique for methods of selecting actively managed mutual funds based upon past performance. He cites studies indicating that actively managed mutual funds vary greatly in their success rates over the long term, often underperforming in years following their success, thereby regressing toward the mean. Malkiel suggests that given the distribution of fund performances, it is statistically unlikely that an average investor would happen to select those few mutual funds which will outperform their benchmark index over the long term.
In 1984 Warren Buffett gave a speech at Columbia University rebutting Malkiel's book and the Efficient Market Hypothesis. See The Superinvestors of Graham-and-Doddsville. As of 2013 Malkiel has not yet responded, and has ignored Buffett's argument. As Seth Klarman has stated: "Buffett's argument has never, to my knowledge, been addressed by the efficient-market theorists; they evidently prefer to continue to prove in theory what was refuted in practice".
However in 2014's letter "To the Shareholders of Berkshire Hathaway Inc.," (page 20) Buffett revealed his instructions in his will (in addition to his investment strategy, as a professional, while alive) to the trustee for his wife's benefit:
It’s vital, however, that we recognize the perimeter of our “circle of competence” and stay well inside of it [..] Most investors, of course, have not made the study of business prospects a priority in their lives. If wise, they will conclude that they do not know enough about specific businesses to predict their future earning power. I have good news for these non-professionals: The typical investor doesn’t need this skill.
The goal of the non-professional should not be to pick winners – neither he nor his “helpers” can do that [..]
Put 10% [..] in short-term government bonds and 90% in a very low-cost S&P 500 index fund. (I suggest Vanguard’s.) I believe the trust’s long-term results from this policy will be superior to those attained by most investors – whether pension funds, institutions or individuals – who employ high-fee managers.
- Burton Malkiel (2011) A random walk down Wall Street: the time-tested strategy for successful investing
- Hardback: ISBN 978-0-393-05854-3, Paperback: ISBN 978-0-393-32639-0