Saving and investing are two key elements to reach financial independence. In this post I review one of the best books about investing I have read so far: A Random Walk Down Wall Street – The Time-Tested Strategy for Successful Investing. I believe this is a good read for any curious mind looking to improve their understanding of money and investing.
Burton G. Malkiel, the author, has a great deal of professional and academic experience in the world of investments. So you can be confident that the advice on this book is coming from someone who is very knowledgeable. The first edition of the book came out in 1973. Several updated editions have been published to include new data and recent market events. The newest edition, published in 2014, provides insights into the 2000’s internet bubble and subsequent crash as well as the real estate bubble that blew up around 2008. To have a good shot at being a successful investor, I believe you have to understand previous boom and bust cycles. This book does a great job explaining and analyzing such events.
Part One – Stocks and Their Value
The first part of the book explores the main two drivers of stock prices. The first, firm fundamentals such as earnings and dividends growth. The second, “the castle-in-the-air-theory”, which states that you can profit from buying stocks with poor fundamentals as long as you can find a bigger fool down the road who will buy it at a higher price. Internet bubble anyone? The book is written in plain English and explains most things through real-life examples so don’t worry about needing a PhD in finance to enjoy it.
Part Two – How the Pros Play the Biggest Game in Town
This part of the book explains the two classic methods for forecasting future stock prices: fundamental analysis and technical analysis. After explaining the basics, the author goes on to explore the merits and pitfalls of both methods. Spoiler alert: regardless of the method used, most professionals fail to consistently beat the market. This is where the “random walk” term comes into play. Throughout the book, Mr. Malkiel makes the case that short term changes in stock prices are unpredictable and random, and that anyone who tells you otherwise is likely a snake-oil salesman.
Part Three – The New Investment Technology
Part three has a section on behavioral finance that I find really interesting. It explores common human behaviors that are likely to do more damage than good when it comes to investing (i.e. herd behavior). Another interesting section of part three is the discussion on risk and reward. The basic notion here is that the only way to achieve higher returns is by taking on more risk. The rest of this section explores concepts such as “smart beta”, and modern portfolio theory.
Part Four – A Practical Guide for Random Walkers and Other Investors
The last part of the book is basically a comprehensive guide to building a solid portfolio based on your age and your risk tolerance. I love the introduction to this part of the book so much that I have to share it with you word by word:
“A widely held belief is that the ticket to a comfortable retirement and a fat investment portfolio are instructions on what extraordinary stocks or mutual funds you should buy. Unfortunately, these tickets are not even worth the paper they are printed on. The harsh truth is that the most important driver in the growth of your assets is how much you save, and saving requires discipline. Without a regular savings program, it does not matter if you make 5%, 10%, or even 15% on your investment funds. The single most important thing you can do to achieve financial security is to begin a regular savings program and to start it as early as possible. Yet few people follow this basic rule, and the savings of the typical American family are woefully inadequate.”
The rest of part four covers all types of investments (CD’s, bonds, treasury securities, etc.), and even some basic tax planning. Finally, towards the very end of the book, Mr. Malkiel lays out “The Malkiel Step”: the author’s owns methodology for choosing mutual funds that, based on his experience, have a good chance of providing better than average returns. Mr. Malkiel is fair to warn you to take this advice with a grain of salt and do your own research before opening your wallet to these funds.
Overall, A Random Walk Down Wall Street is a solid book. The author is a renown academic with a great wealth of experience and an incredible resume. I recommend this book if you are serious about investing and want to make the most out of your hard earned money. You can buy this book online or try finding and reading it for free at your local public library 🙂
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