It has now been close to thirty years since I began writing the first edition of A Random Walk Down Wall Street. The message of the original edition was a very simple one: Investors would be far better off buying and holding an index fund than attempting to buy and sell individual securities or actively managed mutual funds. I boldly stated that buying and holding all the stocks in a broad, stock-market average as index funds do was likely to outperform professionally managed funds whose high expense charges and large trading costs detract substantially from investment returns. Now, some thirty years later, I believe even more strongly in that original thesis, and there's more than a six-figure gain to prove it. The chart on the following page makes the case with great simplicity. It shows how an investor with $10,000 at the start of 1969 would have fared investing in a Standard & Poor's 500-Stock Index Fund. For comparison, the results are also plotted for a second investor who instead purchased shares in the average actively managed fund. The difference is dramatic. Through June 30, 1998, the index investor was ahead by almost $140,000, with her original $10,000 increasing thirty-one-fold to $311,000. And the index returns were calculated after deducting the typical expenses (2/10 of 1 percent) charged for running an index fund.
Document file:///E|/Unposted/Netlib/A%20Random%20Walk%20Down% 047814/nlReader.dll@BookID=32673&FileName=Cover.html [10/7/2007 12:41:52 AM] Document Page 3 A Random Walk Down Wall Street Including A Life-Cycle Guide To Personal Investing Burton G. Malkiel Chemical Bank Chairman's Professor of Economics At Princeton University file:///E|/Unposted/Netlib/A%20Random%20Walk%20Down% 0393047814/nlReader.dll@BookID=32673&FileName=3.html [10/7/2007 12:41:53 AM] Document Page 4 Copyright © 1999, 1996, 1990, 1985, 1981, 1975, 1973 by W. W. Norton & Company, Inc. All rights reserved Printed in the United States of America The text of this book is composed in Zapf Elliptical with the display set in Berling. Desktop composition by Justine Burkat Trubey Manufacturing by the Haddon Craftsmen, Inc. Library of Congress Cataloging-in-Publication Data Malkiel, Burton G. A random walk down Wall Street : including a life-cycle guide to personal investing / Burton G. Malkiel. p. cm. Rev. ed. of: a random walk down Wall Street. c1996. Includes bibliographical references and index. ISBN 0-393-04781-4 1. Investments. 2. Stocks. 3. Random walks (Mathematics) I. Malkiel, Burton G. Random walk down Wall Street. II. Title. HG4521 .M284 1999 332.6dc21 98-50671 CIP W. W. Norton & Company, Inc., 500 Fifth Avenue, New York, N.Y. 10110 http://www.wwnorton.com W. W. Norton & Company Ltd., 10 Coptic Street, London WC1A 1PU 2 3 4 5 6 7 8 9 0 file:///E|/Unposted/Netlib/A%20Random%20Walk%20Down% 0393047814/nlReader.dll@BookID=32673&FileName=4.html [10/7/2007 12:41:53 AM] Document Page 5 To Nancy file:///E|/Unposted/Netlib/A%20Random%20Walk%20Down% 0393047814/nlReader.dll@BookID=32673&FileName=5.html [10/7/2007 12:41:54 AM] Document Page 7 CONTENTS Preface 13 Acknowledgments from Earlier Editions 17 Part One Stocks and Their Value 1. Firm Foundations and Castles in the Air 23 What Is a Random Walk? 24 Investing as a Way of Life Today 26 Investing in Theory 28 The Firm-Foundation Theory 29 The Castle-in-the-Air Theory 31 How the Random Walk Is to Be Conducted 33 2. The Madness of Crowds 35 The Tulip-Bulb Craze 36 file:///E|/Unposted/Netlib/A%20Random%20Walk%20Do 3047814/nlReader.dll@BookID=32673&FileName=7.html (1 of 3) [10/7/2007 12:41:54 AM] Document The South Sea Bubble 39 The Florida Real Estate Craze 45 Wall Street Lays an Egg 46 An Afterword 53 3. Stock Valuation from the Sixties through the Nineties 55 The Sanity of Institutions 55 The Soaring Sixties 57 The New "New Era": The Growth-Stock/New-Issue Craze 57 Synergy Generates Energy: The Conglomerate Boom 61 Performance Comes to the Market: The Bubble in Concept Stocks 69 The Sour Seventies 73 The Nifty Fifty 73 The Roaring Eighties 76 file:///E|/Unposted/Netlib/A%20Random%20Walk%20Do 3047814/nlReader.dll@BookID=32673&FileName=7.html (2 of 3) [10/7/2007 12:41:54 AM] Document The Triumphant Return of New Issues 76 Concepts Conquer Again: The Biotechnology Bubble 78 file:///E|/Unposted/Netlib/A%20Random%20Walk%20Do 3047814/nlReader.dll@BookID=32673&FileName=7.html (3 of 3) [10/7/2007 12:41:54 AM] Document Page 8 The Chinese Romance with the Lycoris Plant 80 Some Other Bubbles of the 1980s 81 What Does It All Mean? 85 The Nervy Nineties 85 The Japanese Yen for Land and Stocks 85 The Internet Craze of the Late 1990s 90 A Final Word 94 4. The Firm-Foundation Theory of Stock Prices 95 The "Fundamental" Determinants of Stock Prices 96 Two Important Caveats 103 Testing the Rules 106 One More Caveat 108 What's Left of the Firm Foundation? 111 file:///E|/Unposted/Netlib/A%20Random%20Walk%20Do 3047814/nlReader.dll@BookID=32673&FileName=8.html (1 of 3) [10/7/2007 12:41:55 AM] Document Part Two How the Pros Play the Biggest Game in Town 5. Technical and Fundamental Analysis 117 Technical versus Fundamental Analysis 118 What Can Charts Tell You? 119 The Rationale for the Charting Method 124 Why Might Charting Fail to Work? 126 From Chartist to Technician 127 The Technique of Fundamental Analysis 128 Why Might Fundamental Analysis Fail to Work? 132 Using Fundamental and Technical Analysis Together 134 6. Technical Analysis and the Random-Walk Theory 138 Holes in Their Shoes and Ambiguity in Their Forecasts 138 Is There Momentum in the Stock Market? 140 file:///E|/Unposted/Netlib/A%20Random%20Walk%20Do 3047814/nlReader.dll@BookID=32673&FileName=8.html (2 of 3) [10/7/2007 12:41:55 AM] Document Just What Exactly Is a Random Walk? 142 Some More Elaborate Technical Systems 145 The Filter System 146 The Dow Theory 146 The Relative-Strength System 147 Price-Volume Systems 148 Reading Chart Patterns 148 Randomness Is Hard to Accept 149 A Gaggle of Other Technical Theories to Help You Lose Money 150 file:///E|/Unposted/Netlib/A%20Random%20Walk%20Do 3047814/nlReader.dll@BookID=32673&FileName=8.html (3 of 3) [10/7/2007 12:41:55 AM] [...]... Richard Quandt, Michael Rothschild, H Barton Thomas, and Robert Zenowich It is particularly appropriate that I emphasize the usual caveat that the above-named individuals are blameless for any errors of fact or judgment in these pages Many have warned me patiently and repeatedly about the madness of my heresies, and the above list includes several who disagree sharply with my position Many research assistants... Company I also acknowledge the helpful assistance of Douglas Daniels, Shang Song, and Robert Ibbotson Steve Feinstein, William Minicozzi, Ethan Hugo, David Banyard, and Deborah Jenkens Yexiao Xu provided invaluable research assistance, and Linda Wheeler offered exceedingly skillful editorial assistance Superb typing support was provided by Barbara Johnson, Barbara Mains, Kay Kerr, Pia Ellen, Claire Cabelus,... edition of A Random Walk Down Wall Street The message of the original edition was a very simple one: Investors would be far better off buying and holding an index fund than attempting to buy and sell individual securities or actively managed mutual funds I boldly stated that buying and holding all the stocks in a broad, stock-market averageas index funds dowas likely to outperform professionally managed... financial environment Much of the new material in this book has been included to explain these financial innovations and to show how you as a consumer can benefit from them This edition takes a hard look at the basic thesis of earlier editions of Random Walkthat the market prices stocks so efficiently that a blindfolded chimpanzee throwing darts at the Wall Street Journal can select a portfolio that... with deadly intent because the stakes are tenure for the academics and bonuses for the professionals That's why I think you'll enjoy this random walk down Wall Street It has all the ingredients of high dramaincluding fortunes made and lost and classic arguments about their cause But before we begin, perhaps I should introduce myself and state my qualifications as guide I have drawn on three aspects... file:///E|/Unposted/Netlib /A% 2 0Random% 2 0Walk% 2 0Down% 393047814/nlReader.dll@BookID=32673&FileName=21.html [10/7/2007 12:42:01 AM] Document Page 23 1 Firm Foundations and Castles in the Air What is a cynic? A man who knows the price of everything, and the value of nothing Oscar Wilde, Lady Windermere's Fan In this book I will take you on a random walk down Wall Street, providing a guided tour of the complex world of finance and... Clarke of The Vanguard Group of Investment Companies, who assembled much of the financial data on investment returns used in this edition, and to Shane Antos and Jonathan Curran, who provided indispensable and superb research assistance Lugene Whitley made extraordinary contributions in transforming various illegible drafts and dictating tapes into readable text Phyllis Durepos also provided valuable... Claire Cabelus, and especially Phyllis Durepos Donald Lamm, Robert Kehoe, and Deborah Makay continued to make my association with W W Norton a most pleasant one Joan Ryan and Claire Bien were extremely helpful in preparing new and updated charts Michele Petersen also assisted in many ways Finally, Rugby was particularly cooperative in agreeing to chew shoes and pillows instead of this manuscript The... and practical advice on investment opportunities and strategies Many people say that the individual investor has scarcely a chance today against Wall Street' s professionals They point to techniques the pros use such as "program trading," "portfolio insurance," and investment strategies using complex derivative instruments, and they read news reports of mammoth takeovers and the highly profitable (and... means that short-run changes in stock prices cannot be predicted Investment advisory services, earnings predictions, and complicated chart patterns are useless On Wall Street, the term "random walk" is an obscenity It is an epithet coined by the academic world and hurled insultingly at the professional soothsayers Taken to its logical extreme, it means that a blindfolded monkey throwing darts at a . Technician 127 The Technique of Fundamental Analysis 128 Why Might Fundamental Analysis Fail to Work? 132 Using Fundamental and Technical Analysis Together 134 6. Technical Analysis and the Random- Walk. of: a random walk down Wall Street. c1996. Includes bibliographical references and index. ISBN 0-393-04781-4 1. Investments. 2. Stocks. 3. Random walks (Mathematics) I. Malkiel, Burton G. Random. file:///E|/Unposted/Netlib /A% 2 0Random% 2 0Walk% 2 0Down% 047814/nlReader.dll@BookID=32673&FileName=Cover.html [10/7/2007 12:41:52 AM] Document Page 3 A Random Walk Down Wall Street Including A Life-Cycle Guide