It had been a while since reading The Bogleheads’ Guide to the Three Fund Portfolio and I was ready for another book on personal investing. A Random Walk Down Wall Street came highly recommended and I promptly picked it up. Written by Princeton University economics professor Burton G. Malkiel, this is considered to be a classic and has had several revisions since its first publication in 1973.
Divided into four parts, the first part documented the various stock market bubbles that have happened in the US and the world. Starting from the tulip-bulb craze (16th century) and South Sea bubble (18th century), it details the tronics bubble and synergistic mergers of the 60s, the biotech bubble of the 80s, the Internet bubble and the housing crisis of the 2000s. After reading this chapter, the current hype of crazy P/E ratios and crypto currencies seems all too familiar.
Part two details how the professionals in the stock market play with stocks. Technical analysts study charts of past data to derive rules and theories to determine the appropriate time to buy or sell a stock. Fundamental analysts use the firm foundation theory to find the true value of a stock based on the company’s finances, competitors and markets. Malkiel shows that there are flaws in both strategies and that neither has proven to deliver results in the long run, especially once transaction costs and capital gains tax are taken into account.
Part three of the book is technical and delves into the modern theories surrounding investment. Modern portfolio theory (MPT) was developed by Nobel prize winner Harry Markowitz in the 1950s and provides the mathematical basis for the time-honored strategy of combining stocks for maximum returns at a given risk. MPT would lead to the creation of Capital Asset Pricing Model (CAPM) in the 1960s by another bunch of Nobel winning economists. Behavioral finance, pioneered by Kahnemann and Tversky, studies the influence of psychology on investor behavior. This section of the book has some of the juiciest experiments and findings about the way humans think and act! The author’s favorite efficient market hypothesis is introduced and he argues that any regularity or pattern that can be acted upon profitably will be destroyed in a short time thus rendering such tricks useless to the normal investor.
Part four is for you are not interested in neither the history nor the theory and just need guidance on how to invest. Malkiel details all the possible investment options from bank savings to bonds to stocks to funds, explaining their pros, cons and best applicable situation to use those instruments. The author’s suggested allocation portfolio is a mix of index funds, REITs, bonds and savings and the details can be found in Chapter 14. The recommendations should not be a surprise to any Boglehead.
Though I picked up the 2011 edition, I found the contents of this book to be timeless and easily applicable even amidst the overhyped stocks and crypto craze of today. The book was an absolute delight to read, filled with engaging historical anecdotes, great quotations, hilarious jokes and crammed with theories and graphs that would make any engineer drool. I also found it highly educational, covering relevant topics in economics with user-friendly definitions of most investment related terms. A highly recommended read.