It’s one of the most famous books on investing ever written. It’s sold more than two million copies. The investment philosophy set out in A Random Walk Down Wall Street, by the Princeton University economist Burton Malkiel, is very much in tune with our own here at TEBI. If you want to deepen their knowledge of investing and the financial markets, it’s a book we highly recommend you read. But what, in a nutshell, can today’s investors learn from Malkiel’s book? Here are ten key takeaways.
Financial markets are broadly efficient
The global asset asset management industry is huge — far, far larger, in fact, than it needs to be. There are so many active fund managers and other professional investors constantly analysing market prices, and they all have access to the same information at the same time. That has made markets very efficient. In other words, at any one moment, the price of a stock reflects the very latest estimate of the entire market as to how much it’s worth. Essentially, prices move in a random fashion, in response to new information — hence the name of the book, A Random Walk Down Wall Street. So it’s actually very hard to say, at any one point in time, whether a particular stock is undervalued or overvalued.
Prices are often “wrong” but profiting from mispricings is hard
Just because markets are efficient, that doesn’t mean prices are always “right”. Indeed, Malkiel explains, they’re often wrong. For instance, the full effect of new information may not be immediately obvious. Some market participants may underreact to news, and some may overreact. And when there’s great uncertainty, markets can be extremely volatile, as we saw, for example, in the early stages of the global Covid-19 pandemic.
Malkiel also acknowledges that markets can make egregious mistakes, as it did with GameStop shares, which soared in value then quickly plummeted again, early in 2021. His point is, though, that “even this spectacular bubble did not provide any easy route to excess profits”. Even if markets aren’t perfectly efficient, they are efficient enough to be, as Malkiel puts it, “extraordinarily hard to beat”.
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