Burton G. Malkiel’s classic investment guide, first published in 1973. In the introduction to this fiftieth anniversary edition, Malkiel states his position in his opening paragraph. That any investor will benefit from a long-term buy and hold strategy in an index fund over actively managed mutual funds (or individual securities). Malkiel now has 50 years of evidence which he outlines as follows: A person with $10,000 to invest in an index fund in 1977 would today (2022) have a portfolio worth $2,143,500, $666,467 more than in the average actively managed fund (p.20).
The title reflects the author’s views on the unpredictability of the stock market. Random Walk Theory makes useless the history of prices (on the basis there is no relationship to the future) and therefore nullifies the role of expertise. He introduces the work of Eugene Fama which I will write about in a separate post. Fama’s famous paper from 1970 analyses stock market behaviour using a model of efficient capital markets, the relationship of resource allocation and market efficiency, the accuracy, or ability of prices to “fully reflect” the information available to investors (Fama, 1970, p. 383).
The second part of the book is a practical guide to investing and asset allocation. Malkiel assesses risk and return, time, dollar-cost averaging, rebalancing and capacity for risk. A life-cycle guide to investing using principles to apply to portfolio management.