Wednesday, June 27, 2007

Review: A Random Walk Down Wall Street, by Richard Malkiel

Topic: Investing, stocks.
Recommended: My friend Matt is getting an MBA at the University of Chicago, so I've been wanting to kind of follow along and try to get a preview of that is like in case I ever decide to do it (get an MBA). So for one of his classes a professor assigned this book, along with Stocks for the Long Run, calling them both "essential" reads.
So it's a stock book, is it an easy read as a business school book? It's an easy read, really. The question isn't about easy but more about what you know and don't know. If you know this topic already well then you'll skip a lot of it because it gets repetitive.
Will it make me rich? Maybe, I'll let you know. Turns out the gist of the book is something I'm already doing with my own investments, so he's kind of preaching to the choir.
Gist: Over the long run, nothing can compete with a properly allocated portfolio of index finds exposed to the following markets: REITs, international stocks, US stocks (especially small caps), and bonds. That, folks, sums up the 400ish pages in this book. If that first sentence doesn't mean anything to you, and you're interested in a safe, easy, if boring way to invest in the long term, then this is the book for you. It lays everything out and explains what you need to know. I wish I would have read this back when I started.
Other books to read with it: Beating the Street, by BC grad Peter Lynch. BC what! This one is more entertaining, less academic, and just as informative. But Malkiel's book is more of a recipe book, giving you everything you need to actually go and do all of this in the real world.
How this book argues its point: By bringing down (or simply disproving) every other investment strategy out there. But still, it gets kind of annoying when he rags on everything under the sun for 350 pages, then FINALLY gets to his point.
How many pages the cliff notes version would be: Forty pages. Ten for a quick overview of everything that doesn't work (down from 360), twenty for the strategy he supports (also twenty in the book), and ten for the resources he includes at the end, which are super helpful and include the actual index funds out there to put the strategy into practice.
Full disclosure: He tells you he is connected to Vanguard, but gives you other, non-Vanguard options. Which is fine since Vanguard is probably the best place to buy a varied set of cheap index funds.
One thing he kind of sidesteps, kind of: Warren Buffett. Granted, I'm a huge Buffett fan, and he's mostly right that, for the average Joe, WB's performance just isn’t going to happen. But he's so adamant about bringing down all active stock-picking strategies (including value investing, which is pretty much WB). And he gives reasons. He does admit that Lynch beat the street for a while, but then quit. He brings up Buffett a lot, but kind of avoids any explanation of how WB is, was, and continues to beat the odds. He says value investing is not possible, that the market is too efficient for that. OK, I'll accept that (though I disagree to some extent). But you can't say that and then acknowledge WB's incredible record (which he can't say anything negative about and doesn't, I mean it's Warren freakin' Buffett!) but doesn't try to explain that, if value investing can't be successful long term, then how do we reconcile what WB has done?
But . . . Part of me knows it's probably best to leave that as is. The average person (and even super investor managers) simply can't do what WB has done. He's an anomaly, a freak—not because of luck. It's ability. Kind of like expecting people to do what Pedro Martinez or Greg Maddux does. It's just not gonna happen. In terms of the book, if 10 million people were flipping coins for the past 50 years, Buffett is the one guy who has thrown nothing but heads. . . still.
Final Word: Great if you want a beginner's look at everything people have tried and doesn't work. Could be a LOT shorter.
Up Next: Liar’s Poker, by Michael Lewis (of Moneyball fame).


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