By Burton G. Malkiel
Classic guide to investing wisely
Subject
Themes
Short-term stock price movements cannot be predicted from past behaviour. This is the random walk hypothesis, and it carries a provocative implication: a blindfolded monkey throwing darts at stock listings could match the results of Wall Street's most sophisticated professionals. Two rival theories attempt to explain stock valuation. The firm-foundation theory holds that every stock has an intrinsic value determined by the discounted present value of its future dividends; Warren Buffett built his fortune on this approach. The castle-in-the-air theory, articulated by John Maynard Keynes, focuses instead on crowd psychology, likening stock picking to a beauty contest where the goal is to guess what everyone else will choose.
Short-term stock price movements cannot be predicted from past behaviour. This is the random walk hypothesis, and it carries a provocative implication: a blindfolded monkey throwing darts at stock listings could match the results of Wall Street's most sophisticated professionals. Two rival theories…
When A Random Walk Down Wall Street first appeared in 1973, its central thesis was considered heretical. The notion that a blindfolded monkey throwing darts at stock listings could match the performance of Wall Street's highest-paid professionals was an affront to an entire industry built on the…
Markets process information with remarkable speed and accuracy. When new data about a company's earnings, a regulatory change, or a macroeconomic shift becomes available, thousands of analysts and traders immediately incorporate it into their buying and selling decisions. The resulting prices, while…
Every speculative bubble in history has followed a remarkably consistent psychological pattern. A new technology, trade opportunity, or financial innovation captures public imagination. Early investors earn extraordinary returns, attracting attention and envy. As more people pile in, rising prices…
Harry Markowitz's modern portfolio theory delivered one of the most powerful insights in the history of finance: investors can reduce the risk of their portfolios without sacrificing expected returns, simply by combining investments whose fortunes do not move in perfect lockstep. This insight, which…
The single most consequential practical recommendation to emerge from decades of financial research is devastatingly simple: buy and hold a diversified portfolio of low-cost index funds. This advice, first advanced in 1973 and validated by four decades of subsequent evidence, has profound…
The most important investment decision most people will ever make is not which stocks to buy but how to allocate their assets among stocks, bonds, cash, and real estate at each stage of their lives. Research by Roger Ibbotson demonstrates that more than 90 percent of an investor's total return is…
Stock prices move in ways that cannot be predicted from their past behaviour. This is the central claim of the random walk theory, which holds that short-term price changes are essentially unpredictable. If true, investment advisory services, earnings forecasts, and complicated chart patterns are…
Professional institutional investors proved no more resistant to speculative fever than ordinary punters. The 1960s saw the tronics boom, in which companies simply added electronic-sounding words to their names and watched their valuations soar. American Music Guild, a door-to-door record seller,…
Two warring schools of professional security analysis dominate Wall Street. Technical analysis, or charting, attempts to predict future stock prices by studying past price movements and trading volumes. Chartists look for formations with evocative names: head-and-shoulders patterns, double bottoms,…
The security analyst began as a quiet statistician wearing a green eyeshade and threadbare blue suit, meticulously recording financial data. Over the decades, the role transformed into that of a glamorous equity research star, flying first class and cultivating investment banking clients. Regardless…
Diversification cannot eliminate all risk because stocks tend to move together. Three academics, William Sharpe, John Lintner, and Fischer Black, set out to determine which risks can be diversified away and which cannot. Their result, the capital-asset pricing model (CAPM), earned Sharpe a share of…
The efficient-market hypothesis faces fierce criticism. The NASDAQ fell 70 percent between 2000 and 2002. The broad market dropped nearly 50 percent from March 2008 through March 2009. The Wall Street Journal called the theory a "remarkable error." BusinessWeek labelled it a "failure." Robert…
Long-run stock returns follow a simple formula: initial dividend yield plus the growth rate of earnings and dividends. From 1926 to 2010, stocks averaged about 9.8 percent annually, closely matching the sum of a 5 percent initial dividend yield and 5 percent earnings growth. Over shorter periods,…
Three distinct approaches to buying stocks accommodate investors with different temperaments and levels of engagement. Each assumes that the fundamental asset allocation decisions have already been made, and now the question is how to implement them. The No-Brainer Step is the simplest and most…
By Burton G. Malkiel
Subject
Themes
Short-term stock price movements cannot be predicted from past behaviour. This is the random walk hypothesis, and it carries a provocative implication: a blindfolded monkey throwing darts at stock listings could match the results of Wall Street's most sophisticated professionals. Two rival theories attempt to explain stock valuation. The firm-foundation theory holds that every stock has an intrinsic value determined by the discounted present value of its future dividends; Warren Buffett built his fortune on this approach. The castle-in-the-air theory, articulated by John Maynard Keynes, focuses instead on crowd psychology, likening stock picking to a beauty contest where the goal is to guess what everyone else will choose.