The book was first published in 1973 with the view of upholding the school of thought that wise investment is critical since market value tends to fluctuate. The book got published eight more times, and the recent publication that this paper will zero in got released in 1999 by Norton Company based in New York (Malkiel, 83). The book comprises of 15 chapters in which the author builds on the importance of amassing relevant market information regarding market structure, idea and style. In his argument, the author emphasizes that it is tough to pin down market investment with the view of long-term gains as there are so many parameters that change along the way.
Background information.
The author has a novel experience in financial matters. In his preface, he states that he has had more than thirty years research on the market financial investment(Malkiel, 13). The experience has helped him draw practical examples to back his intended view on the book. A Practical example is in the scenario encompassing a comparison of two investors in the preface. One investing in holding index fund on Standard & Poor’s 500-Stock Index Fund, and the other purchasing shares in an actively managed fund (Malkiel, 110). The first capital for the two is $10,000 each. During the period between 1969 to June 1998, the first investor would have grown their initial capital to $311,000 while the second one who invested in the actively managed fund would have $271,000. The index returns got arrived at after deducting all the typical expenses for running the index fund (Malkiel, 13).
The author has a strong background in financial knowledge as he states in his acknowledgment that he is an academician. He teaches financial courses and in writing the book he enlisted the help of his academic colleague (Malkiel 115). It is clear that the author is vastly conversant in the field of stock trading. Malkiel gives practical examples of market changes that affect stock trading and goes more in-depth to provide critical definitions of terms that are critical for stock investors ((Malkiel, 23). Some of the terms include Firm-foundation theory, castle-in-the-air theory, the bubble concept in stock among others. The author holds the view that holding on an index fund is virtually the best way of ensuring one maximizes the profits of investing long term.
Summary of Content
In chapter one, the author gives a practical example of how the incredible flourish of the Japanese Land and stock prices in the 1970s plummeted in the 1990s. In his view, investors never factor in the market fluctuation with time, and the change in market structure resulted in the tumbling down of the Japanese land stocks leading to a massive loss by the unaware investors. Chapter one highlights two theories of the firm foundation and castle in the air theory (Malkiel, 76). From a comparison of the two approaches, the author was able to pass his point on why researching the stock product is essential. A firm foundation is created by studying the product on the stock market while castle-in-the-air is the method of investing in what’s trending without factoring in the repercussions it might bring.
Crowd madness plays a role in driving investors into making bad investments. His definition of crowd madness is investing in a venture simply because other people seem to make a kill in it. The drive into the investment is to get rich quickly merely because others seem to be doing well. The sentiment is also well evidenced in chapter 3 and four where the author talks of the tulip bulbs investment in the seventeenth-century and the 1960s Nifty fifty biotechnology and property bubbles that occurred in 1960 (Malkiel 105). The investments at the initial stage were hits but when the bubble burst most investors lost almost everything overnight. The author witnessed the Nifty fifty bubble first hand, and he gave a clear picture of how investors incurred huge losses in his book.
The Internet craze of the late 1990s and early 2000 provides a credible example of the stock bubble (Malkiel, 167). Companies from China and the USA who initially started in the internet craze era proved to reap big during the technology period (Roberts). They doubled tenfold in a year and proved to thrive well in the internet market. Netcom was one of the first companies that grew with the internet craze. The company was among the first to mount a public offer in the 1990s (Malkiel, 97). Its initial public offering was $16 a share. Investors drawn to the bubble pushed the price to 92 dollars cutting a market capitalization of over $1 billion (Malkiel, 92). Unfortunately, the company didn’t deliver as much as they promised to deliver and their stocks came tumbling down. The growth of Netcom made the company introduce “all-you-can-eat pricing” where a subscription of $19.95 gave access to unlimited internet access, clients took advantage of the new deal, and the network could not hold the ever-growing number of clients hence it came crashing (Malkiel, 92).
The 2008 crisis of stock crashing came about as a result of geopolitical crisis (Roberts.) The recession started with the fall in housing prices. Despite the federal reserve’s effort to offer liquidity in the banking industry under the Term Auction Facility, The recession still hit hard on investors. Experienced investors warned against investing in overpriced stocks (Roberts). Investors got wary of making rash moves. They resorted to only investing in stocks with extrinsic value.
The next chapter covers the available means that guide the investor movement of stocks, which are fundamental and technical analysis (Malkiel, 93). The castle-in-the-air perspective of stock pricing allows technical analysts to have a lifeline in the business of predicting point-to-point stock value (110), unlike the principles of the firm-foundation theory. However, these scholarly strategies have not shown consistent success for anyone as of yet, hence, affirming that market movement is arbitrary (133). Most attempts at finding logic in its mechanisms are mere approximations if not futile at best. Chapter 6 resoundingly mocks technical analysis in the description that they “…are usually amusing, often comforting, but of no real value” (157). The random walk theory detests explicitly the use of past stock prices to anticipate future movements. Personally, Malkiel reveals he is yet to meet thriving technicians. Only that he has seen the damage of the boldly broken ones that brush off their losses unapologetically (135). Fundamentalists share the same irrelevance to their subject matter as technicians do as Chapter 7 reveals. Scholarly and empirical evidence shows that fundamental analysis is as ineffective as technical analysis in achieving returns that are above average. Categorically, the efficient-market theory lacks the provision that stock prices are impartial to their fundamental data, and their movement is erratic and random (184). The insufficiency of these methods dwells in the fact that market movements are too efficient and instantaneous that benefitting from such above-average changes is just out of luck.
The author challenges the credibility of technical and fundamental analysis in the prediction of market fluctuation. His book elucidates that the market fluctuates unpredictably and erratically. The technical analysis encompasses the determination of the best time to buy or sell stocks. Fundamental analysis involves the application of firm foundation tenets in the selection of the shares to target for investment. In his argument, the writer goes ahead to post that the financial market changes very first for one to interpret its path. He also affirms that prior movements in the markets are unreliable in foreseeing the future since there are very many variables that modify the market and all of them occur randomly (Malkiel, 97).
Chapter 8 describes the modern portfolio theory that encourages global diversification of investments across the board. These recommendations stand, as “…the timeless lessons of diversification are as powerful today as they were in the past” (208). Chapter 9 detests the off-the-counter risk measures that guarantee high returns in high-risk investments (226). Chapter 10 emphasizes organic market movements. Here, Malkiel proposes that investors should “bow to the wisdom of the market” (253). A buy-and-hold strategy on a diversified financial portfolio does the trick for any investor consistently.
In Chapter 11 the author covers exchange-traded funds (ETFs) and ‘smart beta’ funds. Despite their market dominance, they are not as tax-efficient as capitalization-weighted funds (283). High returns are more likely in high-risk trades than low-risk trades. Assuming the random-walk hypothesis postulated in this book, hard-to-liquefy investments are the only ones capable of promising high returns (327). In the life cycle of an investor’s portfolio, the early stages while the investor is still young should reflect brazen risk-taking in global, high-return, long-term stocks and securities (366). As one nears retirement, this portfolio should have morphed to a low-risk and bond-based. Past retirement age is when one should have transferred the collection to income-producing ventures and bonds (367).
If nothing else, the book demystifies the cloud over investment strategies, maxims, truths and superstitions to settle the argument on the good investment path for interested stakeholders. The conclusion is that low-cost index funds offer individuals better investment options than alternatively selected stocks(Malkiel, 173). Among these alternatively chosen stocks, fundamental or technical analysis are on either side of the divide as to how the market forces work to affect stock prices. Malkiel surgically waters down the potency of technician’s postulations of stock prices with the random walk hypothesis – the previous account of stock prices are not a foolproof means of predicting the future prices (Malkiel 85). According to Malkiel, such a framework is comically impractical (Malkiel 85). He further batters the foundations of technical analysis by highlighting the enormous taxes and transaction costs attached with investing as a technician relative to those of a buy-and-hold scheme.
The technical analysis gets entrenched in the history of stock markets in the hope that the movement of its prices is pattern-like. Malkiel likens such expertise as predictable as the whims of an ordinary gambler (Malkiel, 186). The persistence of technicians in the money market is only as superficial stock-sellers with a bare knowledge of the in-and-out trading to generate commissions that sustain them. In essence, they are self-serving and rarely provide actionable returns for their clients. This cynicism towards technicians stands to date even with the reduction of transaction fees relative to their exorbitant costs in the 1970s when the first copy of “A Random Walk” came to be. As earlier stated, Malkiel considers their methods to be”…usually amusing, often comforting, but of no real value” (157). However, these considerations are fit for individual investors only. Professional investors that are technicians tend to align themselves subjectively with their limited conceptualized theories. Also, foreign exchange and commodity traders ascribe to technical analysis that lacks the measurable aspects of equities. Hence, fundamental analysis steps in as the framework for analyzing stock price movements.
Intended Audience
The Author’s intended audience is market investors especially those who invest heavily in stocks. Through his work on “A Random Walk Down Wall Street.” We get to see analysis and get a lesson on how to approach stock trading. The author is hung on proving that market prediction is not the right way for investors to use in their quest of increasing their investment returns. Throughout the book, the author gives credible evidence of resulting outcomes that have led to merely loses because investors were hung on investing through market prediction. The Author also targets any new investor who wants to get into the stock marketing (Malkiel, 13). The first lesson he gives is that they are better off starting their investment using passive methods like holding index stocks/funds as opposed to actively investing (Malkiel 98). The reason he gives is that there are many deductions and charges one incurs in acquiring the services of actively managed funds services. Holding on to the stock, however, has minimal if no costs and the risk of suffering losses is low. Another group of audience targeted by the author is market analysts. In his book, Malkiel gives a personal statement that he has never seen a successful technician or analyst in his years of experience, but he has seen a wreck of broken ones that attribute their failures to human error (Malkiel, 173).
The book focuses on a specific area of financial investment; it largely zeros- in on investments that exist on the stock exchange, some example of the investment fronts include property investment, biotechnology investment front and also in innovation fronts that express fast growth (Malkiel 106). The principal characteristic of the mentioned investment fronts that makes them valuable and applicable to this book is the fact that they have high and quick returns. These options are easily attainable within the stock market making them easy to invest in at any given time. The author targets anyone interested in investing in the stock exchange whether they know how to invest in the stocks or not.
Thesis Statement
The value of a stock investment gets determined by the actual value of what is getting invested.
The thesis statement above explains that before investing, it is wise to get the actual value of the company one desires to invest in rightly. One should not get carried away by a sudden shoot of stock in the market. The shoot might be a bubble about to burst. Determining the actual value of the cost helps to reduce the risk of it plunging into losses. It also helps to determine the structure and strength of the investment. Investing in quality stock comes with some sense of assurance that the stock will do well in the market (Malkiel, 61). Buying what seems reasonable on the stock market without doing a background check might result in an unprecedented loss since the market changes rapidly and only investments with a stable structure can withstand the rapid change.
Malkiel stresses in his book on the importance of investing in stocks by analyzing the information, data, and structure of the investment (253). He also discourages investing in managed funds as they end up increasing incurred expenditures that eat into the returns that one expects (Malkiel, 13).
From the thesis stated above, it is clear that the author stresses more on the research of stock product quality rather than on the graphical trending of the product in the stock market. In chapter 3 and4 the author gives examples of how investing in the stock just because it is soaring high might turn out to be a bubble that is about to burst taking down all the investors who invested blindly merely because they wanted to get rich overnight.
Critical comments
The purpose of the book was to show that stock investment can majorly flourish where research is done. The author in his work has proved that investing without research often leads to unexpected outcomes. Through practical scenarios like the tulip bulb investment collapse and the Nifty fifty collapse, the writer has been able to prove his point in the book. The contribution made by the book is that it has been able to show how important research is on investment. Getting to know the quality of the product involved in the stock exchange helps to cushion against uncertain eventualities that might lead to huge loses on the investor. The writer has proven that investing in stocks simply because others are doing it leads to high chances of investing in a bubble that might lead to loss of investments (Malkiel, 71). The writer has also shown that investing in third parties, as much as it seems lucrative often leads to incurring of extra costs that eat back on the profits accrued. Finally, the writer backs up his thought of passive index fund investment is the safest way of investing through giving a factual scenario in his preface ( Malkiel, 13).
Conclusion
This text does not offer one of the fundamental and practical frameworks of investing. However, it informs students, analysts and professional investors of both the research and practice gap in their field. Most of what sounds good on paper are now under attack from the lessons in history. This book edges at the upper echelons of investment knowledge due to its authority in the field. Adjusting risk throughout the lifecycle of an investment portfolio matures it properly. The market dependably adjusts itself, and if stocks are held, their value will eventually rise (Malkiel, 108). Inference on real-life financial markets movements is haphazard because of inaccurate data, poor framework of analysis, and parallelism in conclusions based on shaky theories. Malkiel implores investors to aim at average investments for average returns for viable long-term fiscal performance.
The author has been able to prove that the rapid fluctuation in the stock market provides a severe threat to investment (Malkiel, 135). The rapid change creates a challenge of impairing prediction hence humans cannot claim to have a lasting solution for long-term stock investment. The best possible way of securing gains in investment returns is through studying the stock being invested on and sticking to a passive investment method like holding onto index funds as opposed to investing in actively managed funds.
In summary, the lessons offered by the book are practically applicable in successful stock trading. The book rightfully discourages the move of buying stocks through crowd madness just because other people are doing it (Malkiel, 110). It champions for analysis of the structure and quality of the stock before committing to investing in them. I hold the view of the author that playing safe and investing in stocks that one has wholly researched is the best move of maximizing returns while at the same time minimizing cost.