Book Review: A Random Walk Down Wall St.

I just finished reading the classic book on personal finance and investing, A Random Walk Down Wall St. written by Dr. Burton Malkiel (Professor Emeritus at Princeton U. Economics). It’s been said that Dr. Malkiel has the common sense of Benjamin Franklin, the academic/institutional knowledge of Dr. Milton Friedman and the practical experience of Warren Buffett. His investment advice is considered by the Wall St. Journal to be “the best and latest investment advice money can buy.” I’m really happy I finally finished reading this book. I tried reading it for the first time back in 2016 and was not able to do so. At the time, the book was way too advanced for me and I didn’t have the background knowledge to be able to really understand it at a deep level. However over the years, I’ve learned more about finance to the point where I now feel confident when it comes to topics such as saving for retirement, investing in securities, personal finance, etc. I was so happy with finishing the book that I wrote to Dr. Malkiel at his Princeton email address and he responded! I will cherish this memory forever and will always thank Dr. Malkiel for the knowledge that he imparted with me through his book. Here are the top five lessons that I learned from A Random Walk Down Wall St.:

1. The Efficient Market Theory (EMT) and how it affects price action: The Efficient Market Theory in all three of its forms (“weak”, “semi-strong”, “strong”) tells investors the market is so efficient that there’s really no way to time the market or predict what is going to happen to the price of any security in the future. Securities do indeed behave in a “random walk”. Technical analysis is not going to help with predicting future price action for individual securities (EMT “weak” form). Fundamental analysis is not going to help with predicting future price action for individual securities (EMT “semi-strong form”). Though this is debatable, even insider information is not going to help with predicting future price action for individual securities (EMT “strong form”). The market will incorporate news and investor sentiment into price action so efficiently that it’s worth repeating again: no one can time the market and no one can predict an individual security’s future price action from it’s historic price action!
2. You do not need to trust the advice of experts: Dr. Malkiel uses a famous example throughout the book that’s super interesting - if you have a blind-folded chimpanzee throw darts at the stocks page of the Wall St. Journal, the chimpanzee will hit certain stocks; investing in a portfolio of these randomly selected stocks will do just as well (if not better) than a portfolio managed by a professional investment fund manager! Practically speaking, buying index funds pegged to the S&P 500 index will do better than the performance of any fund managed by a professional investment fund manager over time. You can consistently ride the highs and the lows of the market over time, such that you build a fortune over many years. Wealth is never built overnight; it takes time and consistent effort!
3. When it comes to selecting a mutual fund, there are three factors to consider:

• The first is the risk level. If you want more gains, then you are going to have to take more risks. This is obvious: when it comes to the world of finance if there is no risk, then there is no reward. You should take more risks as a young person and take less risks as an older person when it comes to the risk/reward ratio.
• The second is that you should avoid purchasing funds with large amounts of unrealized capital gains. This is because when those gains are realized, taxes have to be paid and the investor is subject to capital gains taxes. You should wait for the gains to be distributed and buy when the prices of the share drop by the amount distributed. This is smart. Look at things like turnover ratio for an idea of a mutual fund’s amount of unrealized gains.
• The third and final one is the expense ratio. This one is important because this is the annual fees you have to pay to the mutual fund in terms of operating costs. The lower this fee, the better. Sometimes we think that a highly-rated mutual fund with a high expense ratio is better and will perform better. But this is not so! You want to find mutual funds with low expense ratios and know that many times it’s the not so highly ranked mutual funds that have the best performance.

4. Beware of bubbles!: Warren Buffett has a saying: “People get excited when others get excited; they get greedy when others get greedy; they get fearful when others get fearful; and they will continue to do so”. When there’s irrational exuberance in the market or optimism about a particular security without an understanding of the intrinsic value, that’s when a person needs to be the most careful. The easiest way to lose a lot of money is to be swept up by a bubble without doing your own research and homework. Because when you invest based on emotions, this is now speculation and no longer investing. It’s never about how much money you can make; rather it’s ALWAYS about how much money you keep and don’t lose! I understand that bubbles are really hard to tell in the present moment. But always do your homework before investing in something! Don’t get caught up by the hype. We always make the worst investment decisions when we make them emotionally and impulsively.
5. Don’t do day trading or trust any form of technical analysis: Technical analysis doesn’t work. It’s really more like astrology; just don’t do it. No one can predict the market and no one can time the market. Moreover when you go in and out of the market frequently, you are subject to brokerage commission fees and taxes. These expenses add up and it’s just not smart. Trading is really more for institutions who have the resources and the team structure to really take advantage of the market. A retail trader may make some money, but it will not be consistent money and losses can be pretty strong. So be careful!

These were all the lessons that I learned from A Random Walk Down Wall St. I’m so glad that I finally finished reading the book. I wish I had the background knowledge to understand the book earlier in life, but sometimes life happens. Had I known some of this information earlier, I could have put myself in an even better financial position than I’m in today. But I’m still very young and to have learned all this information at a young age is truly a blessing. I’m going to consistently invest and look to always learn more. I really think that the key to all this is to stay informed and to always keep learning. There’s no secret here; it takes discipline, curiosity, and learning/teaching to become a good investor. Dr. Malkiel’s lessons have certainly been more cost effective than if I hired my own financial advisor! I’ve just saved myself thousands of dollars and now I have a strong foundation to learn even more about investing. I hope to pass this information onto others!