The Random Walk Guide to Investing: Ten Rules for Financial Success

Burton G. Malkiel

1 A Good Place to Start
This is a good place to start if you want to get in on the action and try to prepare for your financial future. The advice is mainly sound: Start early to take advantage of compounding. Beware of financial advisors for they are mainly interested in theirown financial health and not yours. And for heaven sakes, get rid of that credit card debt. Small economies (a dollar here and a dollar there) mount up. Persistence is more important than insight, savvy, or market timing. A good way to go broke is to purchase those IPO's (Initial Public Offerings) and hold them while the lock up expires. IPO is like taking heroin intravenously. Sure it can be fun for awhile, but it also can lead to death. Oh, yes about those CFA (Chartered Financial Analysts), stock analysts, brokers and other gurus: Forget them for they are more often wrong than right as a detailed retrospective analysis of their predictions clearly shows. The real problem with a book like this is that it is overly general and simple. The advice can't apply to all people at all times. Yes, it might be safe to diversify and rebalance your portfolio. But then again, it might be safer not to do those two things. Bill Gates made money by being concentrated in one stock. George Soros made a billion in one currency (the British Pound) on one bet at one time. When these gentlemen diversified, they didn't do as well. Rebalancing your portfolio each year means you sell the stocks that did well and buy more of the ones that didn't. You could end up with a portfolio of cripples that way. What really counts is owning the right asset at the right time. This book doesn't tell us how to do that. Instead, it suggests we abrogate our individual judgment to market professionals and just buy an index. That results in the usual dilution of experience so characteristic of modern times. It's just like sex with a condom, low nicotine cigarettes, decafe coffee, hot tubs that are luke warm, etc. -- safe alright - but not much fun.

2 A great book on investing
I've read a number of good personal finance and investment books but I have to say that I like this one most of all. The author is well respected and an authority in the field. The book is a quick read but it's filled with useful information written in a very readable style. I wish every book was like this.

Malkiel gives the reader some very fundamental advice on investments (index funds), asset allocation and planning your finances based on your risk aversion and age. It's simple and very straightforward. There are no gimmicks or get quick-rich schemes. And that's what I really liked about the book. This book gave me the confidence to manage my own investments and knowledge to do it intelligently. I would highly recommend this book to anyone especially people who are new to investing or people who are confused about all the options out there. Simply a great book!

3 Simply Brilliant
RWG to Investing shines in its simplicity and brilliance.
The only investment book and probably the only financial advice (advisor) you will ever need.

4 Stop Right There
This book has a lot of interesting information however, the theory behind it, that nobody can beat the stock market except for "business people", because stocks are efficiently priced is a bit absurd. Every day I receive a fax touting one pink sheet stock or the other. I have, out of curiosity looked into some of these company's and found that they often have little or no assets and are mainly shell corporations. The point is that because of the constant touting there stockprice almost always rise significantly and than plummets. This "pump and dump" form of market inefficiency extends to much larger securities (e.g. .Com bubble) as well. It is difficult to argue that since stockprices are determined by people who aren't always rational, that value of a security is at any random point in time rationally priced.

The argument that managed funds (after fee's) underperform index funds is a truism just as much as stocks will outperform bonds over the long term is. Stocks outperform bonds because a company's wouldn't borrow money unless they could reinvest that money at a higher rate. Similarly, Mutual Funds, in aggregate, since they own so many securities become in effect almost the same as index funds except they charge higher fee's. If your really interested in learning more about proper portfolio allocation read The Intelligent Investor by Benjamin Graham.

5 None of The Wall Street Reforms or Tax Cuts Have Been Aimed
at average investors. So don't wait for the "magic" to happen. Get educated about investing. This is certainly one of my top 10... Smart investors make their own magic, one step at a time...

6 Good book, except for one problem
I just had a few comments to make.

Malkiel is famous for his position that no-one can beat the stock market over the long term. The evidence for this is so sobering that I won't repeat much of it here, since it's now so well known--such as 90% of the mutual fund managers failing to beat the indexes year after year. Also, managed funds vs. index funds have higher expense ratios, which further lessons their performance since those costs are passed on to the customer. This is certainly a potent argument in favor of investing in index funds that track various things, such as growth stocks, high tech, or the broad market.

However, there is one major problem with Burton's argument which he doesn't discuss in the book that I could recall. Burton's data refers to mutual funds, which typically buy many stocks. At its height, for example, the big Magellan fund owned 1400 stocks. The average mutual fund owns about 100 stocks, and many own more. The turnover can be as high as 75% a year or more, which further increases costs because of all the commissions.

The problem with needing to own that many stocks is that mutual funds often run out of top-quality picks, and then are forced to buy second or even third-tier stocks, which degrades their performance. This almost guarantees that there will be a regression to the mean in terms of overall performance of the sort Malkiel talks about. However, the small investor has no such limitation. He can cherry pick and create a top-quality portfolio without having to buy the less steller (or worse) stocks that would make your typical mutual fund manager green with envy.

The problem here, of course, is being able to ferret out the top quality stocks. Malkiel would point out that this approach isn't without its risks, either, since such a portfolio with a small number of stocks could lack diversification. However, there's a way to deal with that. If you had, say, $100,000 to devote to a portfolio of stocks, you would be adequately diversified if you bought 15-20 stocks and picked the best stock in different sectors, ranging from high-tech to low-tech such as retail. Some people find that this is too many stocks to track, and that 10-12 in different sectors is a good compromise that still offers good diversification without having to track so many stocks. This has been proven to be almost as effective a way to diversify as buying the overall market (the economist who developed this asset allocation theory won the Nobel Prize in econ some years back), but has the major advantage of not diluting the strength and quality of the portfolio with poorer stocks.

Since Burton is a financial economist I'm surprised he doesn't seem to be aware of this. If you didn't want to devote all your money to this strategy, you could still put half of it in index funds and then use the other half for this. Whichever way you decide to go, good luck and happy investing!

7 Practical investment advice for people in any stage of life
This book provides an excellent framework for planning out your course of investments over the next decades, making sure that you're balanced correctly for the amount of risk you're willing to have now and the goals that you have in the future. It helps you understand why heavily trading stocks daily or monthly can work for some people but, for most people, it's better just to play the whole market and rely on the aggregate behavior in the long term.

I also loved that he took the time to debunk analysts, heavily managed mutual funds, and helped explain some of the details to look at in prospectuses -- I know that I personally had trouble understanding them in great detail when my 401k gets updated or they revise the rules.

For people who don't think they're going to magically get rich in the next 5 years, I'd highly recommend this book.

8 A Wonderful College Graduation Gift
While this book is geared to novice investors, even experienced investors (successful or not) and their portfolios can benefit by reading it.

The bottom line is Malkiel is a steadfast believer in index funds; not just equity, but also bond and real estate (reit index funds).

Like Malkiel, I am a fan (and investor) of Vanguard's Total Market Fund. After reading this book, I will be stepping up what has been to date a gradual shifting of my investments from individual equities and a couple equity funds to VTSMX.

This book is well written and very readable.

I beleive that this book would make a great college graduation gift. One of the keys to having a "respectful" nest egg is to start investing early! In plain English, Malkiel demonstates the benefits of investing early and consistently.

I would not hesitate to recommend this book.

9 Required Reading
Burton G. Malkiel's book, "The Random Walk Guide to Investing: Ten Rules for Financial Success" should be required reading for all investors! It spells out a proven way to invest safely and profitly by ignoring Wall Street's flim flaming financial brokers and advisors. Index investing beats 90% of all actively managed funds over the long haul. Index Funds are more tax efficient and are less costly to own. The reason that this information is less talked about is that alot of money is being made with excessive fee and transaction costs associated with actively managed funds!

10 This is the best investment guide I have read yet.
Burton Malkiel is the author of the incredibly successful investment theory book "A Random Walk Down Wall Street" first published in 1973. Thirty years later, his publisher suggested he writes an investment guide capturing the wisdom from "A Random Walk" in a shorter tome aimed at the layperson. Malkiel did exactly that. In this book, he does a beautiful job in avoiding statistics out of reach for the layperson. Yet the investment advice remains sharp and relevant.

Malkiel covers a lot of ground in investments, financial planning, retirement, savings for college, and insurance in just 180 pages. He structures this knowledge through just ten basic rules. Throughout, he includes numerous useful tools. One is the famous rule of 72. If you divide 72 by the investment return, it will tell you how many years it takes to double your investment. Thus, Malkiel covers all the basics and also explores the cutting edge of behavioral economics from the luminaries in this field including Robert Shiller (Irrational Exuberance) and Richard Thaler. This book is just as interesting to the layperson and the investment professional alike.

Malkiel advice can be summarized as follows. Save regularly through 401Ks and other means. Invest in low cost mutual funds and index funds across four asset classes (money market funds, bonds, stocks, and REITs). Invest according to your optimal asset allocation which reflects your time horizon (driven by your age), your financial capacity to absorb losses, and your risk tolerance. Take full advantage of tax advantage investments, including 401Ks, IRAs, Education Savings Accounts. The book includes many more fascinating aspects of investing.

Malkiel outlines eloquently the benefits of index funds. They incur lower operating costs. They have lower turnover, which leads to lower transaction costs and greater tax efficiency. Consequently, index funds beat actively managed funds by 2 percentage points. Malkiel states this superior performance is a direct result of index funds low cost advantage. The higher cost handicap of actively managed funds is insurmountable over time. As a result, the S&P 500 index beats out 84% of large cap mutual funds over 10 years, and 88% over 20 years.

This leads to one of Malkiel most surprising point. Two investors investing $1,000 in an IRA earning respective returns of 6% and 8%; the investor earning 8% will have more than twice as much money in his account after 40 years ($21,725 vs. $10,286). I thought Malkiel made a typo. I calculated the figures, and he did not. This has huge implication in a long term investment environment where single digit returns will become the norm. Costs matter a lot!

On diversification Malkiel includes much original intelligence. He makes a strong case that international diversification is not all what it is cracked up to be. This is because international stock markets move increasingly together when the U.S. one experiences a downturn. Also, he mentions that REITs provide excellent diversification benefits (better than international stocks). I have personally done much research on this subject, using regression analysis. And, Malkiel is correct, even though this fact is unknown to Wall Street.

Malkiel recommends different asset allocations for different age brackets (Life-Cycle investing). He tracks how these different asset allocations performed over the past 20 years (January 1983 to December 2002). It is stunning to note that the most aggressive asset allocation targeted to young people with a 65% stock exposure would have earned a 11.52% return or only one percentage point greater than the most conservative one targeted at senior citizens with only 25% stock exposure which earned a 10.51% return. On the other hand, the most aggressive asset allocation would have suffered 20 quarterly losses with the worst one being minus 14.5%; meanwhile the most conservative asset allocation would have incurred only 16 quarterly losses with the worst one being only minus 5.0%. This gives you pause on how much additional risk is it worth taking.

Malkiel does also a credible job of explaining the superior long term performance of Warren Buffet and Peter Lynch despite the efficiency of the markets and the overall superiority of index funds. Of the two, he states that Peter Lynch record is much less impressive.

He attributes much of Lynch record to the laws of randomness. If you have a 1,000 coin flippers and you make them flip a coin 10 times in a row, you will have one coin flipper who will have flipped tails 10 times in a row. He will be perceived as a genius. But, he was just lucky. Observing Peter Lynch record, his hand got progressively colder as his Magellan fund became larger and his tenure lengthened. This is exactly what Malkiel expected. Lynch genius was to retire close to the top. He retired at the young age of 46, when his record viewed over his tenure could still be perceived as legendary.

Warren Buffet case is completely different. In Malkiel view, he is not so much an investment genius, as a businessman. Buffet has often intervened in running the companies in which he invested when they were faltering. This was the case for the Washington Post, Salomon Brothers, and many other companies Buffet invested in. So, to compare Buffet?s record to the S&P 500 is comparing apples and oranges. Buffet record can't be replicated by any regular investors who have no control over the companies they invest in.