A Random Walk Down Wall Street
- Monday, August 30, 1999
Is it possible that films, music, and books can change our lives? The Bible certainly qualifies in this category since few other books can address the source of true riches and ways to invest in the priceless.
But have you ever felt that way about a finance book?
I am delighted to give applause to A Random Walk Down Wall Street by Burton G. Malkiel. Extolled as "one of the top investment books of the century" by numerous financial experts, this book survives as a "classic" in investment literature.
While consistently appearing on university finance courses' "required reading lists", A Random Walk is surprisingly easy to traverse. Malkiel's guidance proves eloquent (and funny) as he carefully leads you down a simple path towards market savvy awareness. The basic premise of Random Walk's first edition, (published in 1973,) was that the market prices stocks so efficiently that a blindfolded chimpanzee throwing darts at the Wall Street Journal can select a portfolio that performs as well as those managed by the experts. After years of studies and following recent market data, Malkiel now concludes that "there do seem to be some techniques of stock selection that may tilt the odds of success in favor of the individual investor." Throughout the book, he explains the theoretical and practical applications of those techniques.
You may be surprised to learn that finance history can actually be entertaining. In Part I, stories of the Holland Tulip Bulb craze and other incidents of mass hysteria will help you evaluate black beetle, beanie baby, and Internet IPO bubbles when they begin to arise. Indeed, we can learn from history.
In Part II, Prof. Malkiel identifies the two approaches professionals take towards investing. The first technique -- technical analysis relying on the movement of graphs -- proves utterly disastrous. The second technique -- fundamental analysis based on the recognized value of the firm -- wins out in the long term. (Day-traders take note!)
Part III presents the academic theories describing the movements we see in the market, including Modern Portfolio Theory which explains the need for diversification across asset classes. Part IV offers a practical guide of ways to take, assimilate, and effectively utilize the information on applied issues such as term life insurance, taxes, and knowing your investment objectives. Malkiel includes a Life-Cycle guide to investing that provides an assessment of your risk tolerance and suggested portfolio allocations for each season of life.
With thousands of financial books on the market today, A Random Walk Down Wall Street is essential reading if you want a basic foundation and means by which to evaluate the perpetual flow of information in this field. Perhaps best of all, after 25 years and 7 editions, Malkiel's writing is exceedingly humble, allowing individuals to arrive at their own conclusions.
The only all-important issue Malkiel left out was the emergence and rising popularity of values-based investing. However, his approval of this ethical approach to investing is clearly demonstrated based on the theories he outlines (Click here to read: How Will Values-Based Investing Affect Your Returns?" Part 2). We'll remind him to be more explicit in his 8th edition...
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