Anyone can write an investing book and seem smart in the moment. A “hot” stock-picking strategy might even get lucky and succeed for a few months or a year, as more people jump on the bandwagon — enough time to make the author rich.
But when a writer espouses the same basic investment strategy across twelve editions of the same book through 48 years, and it keeps on making readers rich…it’s time to listen. That’s exactly what Princeton economist Burton Malkiel has done with A Random Walk Down Wall Street, one of the best-selling (and best-performing) investing books in the world.
To write this book review, I got my copy at the local library, which I highly recommend because it’s free! However, I also ended up reading an older edition and missing out on a little added wisdom from recent updates because of that. If you want to own the book yourself and know exactly which version you’re getting, you can use one of the affiliate links below to order it (learn more). We keep our recommendations unbiased by dedicating 100% of our affiliate profits to charity.
- 2020 edition on Amazon (most convenient)
- 2020 edition on eBay (sometimes cheaper)
- Older editions on eBay (way cheaper)
Efficient Markets and Monkeys with Darts
Underpinning the main thesis of A Random Walk Down Wall Street is something called the efficient market hypothesis. The idea is that the public stock market is a big place with fierce competition. Because so many people are trying to make favorable trades all day long, stocks are almost always priced fairly.
Think about it this way: If a stock’s price is currently $30, but new information indicates that it ought to be worth $35 instead, thousands of people will rush to buy it as quickly as possible, bidding its price up until it reaches that fair market value. If a stock were overvalued, its owners would quickly attempt to sell it, flooding the market and driving its price downward to correct the error.
In its strongest form, the efficient market hypothesis says that all publicly available information is reflected in the current price of every stock, all the time. If a spectacular deal exists, it will be instantly exploited until it’s gone.
In reality, there is sometimes a large disagreement about the “right” price for a stock. In those cases, the price usually ends up somewhere in the middle — still reasonably close to where it “ought” to be.
This might sound a little abstract to the average person at first, but it actually implies something very useful: Over the long run, it’s incredibly difficult (if not impossible) to beat the average return of the stock market by picking individual winning stocks yourself — so you might as well save a lot of time and effort by investing in broad index funds instead.
In Dr. Burton Malkiel’s colorful words: “…the market prices stocks so efficiently that a blindfolded chimpanzee throwing darts at the stock listings can select a portfolio that performs as well as those managed by the experts.”
Malkiel argues (and provides copious evidence to prove) that even professional stock market mutual fund managers have a tough time beating index funds consistently. His conclusion is that the performance of actively managed mutual funds trails their respective indexes by an amount roughly equal to the fees they charge for their service. In other words, active mutual fund managers charge extra fees for nothing!
As you can probably imagine, this book was not very well-loved by hedge fund managers and Wall Street hotshots when it was first published. But it’s had a huge, positive impact on the average individual investor. In fact, when the first edition was published, low-fee index funds didn’t even exist — Dr. Malkiel called for their very creation.
A Focus on Risk
Personally, my favorite parts of this book were the sections on Modern Portfolio Theory and the Capital Asset Pricing Model (CAPM). Its coverage of these deep topics was surprisingly light on math, while still conveying the important takeaways with easy-to-understand analogies and hypotheticals.
For example, instead of talking abstractly about “diversification through assets with inversely correlated returns,” Malkiel uses an easy-to-understand example: Simultaneously investing in both an umbrella manufacturing company that profits during rainy seasons, and a luxury resort that profits when the weather is nice.
Obviously, I can’t do justice to Modern Portfolio Theory and the Capital Asset Pricing Model in a matter of a few paragraphs, but some of the biggest conclusions I’ve come away with from this section of the book include:
- The only way to get reliably higher long-term returns is to assume additional risk. If a financial product promises higher returns with lower risk, it’s probably too good to be true.
- Not all additional risk results in higher expected returns. The market only rewards “systematic risks” — risks which cannot be eliminated via diversification. Because of this, a diversified portfolio is preferable to a concentrated one in the long run.
- The best way to control the systematic risk (and the expected return) of your portfolio is to adjust the ratios of different broad asset classes (like stocks, bonds, and cash) you hold — not to carefully select specific securities.
- If you want to get a little more granular, you may be able to boost expected returns (and risk!) by overweighting things like small-cap stocks, which tend to be more volatile than the market as a whole. But in doing so, it’s still preferable to buy a diverse basket of them, rather than selecting specific ones you think will outperform.
Dr. Malkiel performs an effective balancing act here. He provides enough evidence and explanation to make convincing arguments, without boring readers to death or overwhelming them with too much data. Some of the earlier chapters could have benefitted from this type of brevity.
Criticisms and Missing Pieces
While the author is good about avoiding complex math, he is still an academic at heart. The book is mostly dry and to-the-point, with just a few welcomed sprinkles of conversational language and humor throughout each chapter.
Occasionally, he uses language that a novice investor may not immediately understand. Terms like “dividends,” “short selling,” “P/E ratio,” and “call options” are used without explicit definition, only to be explained much later. Oh, and he really loves the word “soothsayer” for some reason. Just be prepared to do a few quick Google searches as you read, and you’ll be fine.
The most approachable and applicable part of the book is actually hidden away at the end. In the final chapters, Dr. Malkiel gets down to business and actually talks about how to invest, what your portfolio might look like at each stage of life, and what mutual funds and ETFs you might choose from.
I was happy to see our own favorite Vanguard ETFs (VTI, VXUS, VT, BND, BNDX, and BNDW) among those recommended in the book. However, direct investing advice isn’t given very clearly or emphatically. By the end, you’re still left wondering exactly what to invest in. The author gives guidelines, but wants you to draw your own conclusions.
The bulk of this book is spent building a foundation of knowledge and dispelling a lot of popular investing wisdom using facts and logic. By the end, even most skeptics will become believers in efficient markets and low-fee index fund investing. But if you’re already receptive to those ideas, you may prefer a book with more directly applicable advice, like The Simple Path to Wealth by JL Collins.
If you want to know how to find “winning stocks,” this book is not for you, either. The thesis of A Random Walk Down Wall Street is that stock picking is mostly a waste of time. With that said, Burton Malkiel himself admits that it’s still pretty fun to try, and he briefly discusses his own rules for selecting individual stocks wisely (as a very small portion of a mostly-indexed portfolio).
It’s also worth noting that this isn’t a FIRE (financial independence / retire early) book. The author assumes that most readers are on the traditional, retire-by-65 life path. But as an early retiree, I found it pretty easy to fill in the gaps. Almost everything in the book is still applicable to someone who wants to leave full-time work by their 30s.
The most important thing that this book won’t teach you is where to get the money to invest in the stock market in the first place. It is strictly an investing book. There is almost no discussion of controlling your spending. There’s not much information about paying less for insurance or driving an older car to save money. And there’s not a lot of inspirational language about the freedom provided by saving money early in life, either. That’s all left for you to figure out.
If you’re at a stage in life where you have a significant sum of money to invest, this book will serve you very well. It’s worth taking a deep dive into the reasons behind the investment decisions you’re making, so that you can make them with more confidence and dedication. But if you’re just starting out on your financial journey, it may be worth focusing on the more personal parts of personal finance first.
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