A Random Walk Down Wall Street. B. Malkiel


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.

Why then a seventh edition of this book? If the basic message hasn't changed, what has? The answer is that there have been enormous changes in the financial instruments available to the public. A book meant to provide a comprehensive investment guide for individual investors needs to be updated to cover the full range of investment products available. In addition, investors can benefit from a critical analysis of the wealth of new information provided by academic researchers and market professionals—made comprehensible in prose accessible to everyone with an interest in investing. There have been so many bewildering claims about the stock market that it's important to have a book that sets the record straight.

Over the past quarter century, we have become accustomed to accepting the rapid pace of technological change in our physical environment. Innovations such as cellular and video telephones, cable television, compact discs, microwave ovens, laptop computers, the Internet, e-mail, and new medical advances from organ transplants and laser surgery to nonsurgical methods of treating kidney stones and unclogging arteries have materially affected the way we live. Financial innovation over the same period has been equally rapid. In 1973, when the first edition of this book appeared, we did not have money market funds, NOW accounts, ATMs, index mutual funds, tax-exempt funds, emerging-market funds, floating-rate notes, inflation protection securities, equity REITs, Roth IRAs, zerocoupon bonds, S&P index futures and options, and new trading techniques such as ''portfolio insurance" and "program trading," just to mention a few of the changes that have occurred in the 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 Walk—that the market prices stocks so efficiently that a blindfolded chimpanzee throwing darts at the Wall Street Journal can select a portfolio that performs as well as those managed by the experts. Through the past thirty years that thesis has held up remarkably well. More than two-thirds of professional portfolio managers have been outperformed by the unmanaged S&P 500-Stock Index. Nevertheless, a number of studies by academics and practitioners, completed during the 1980s and 1990s, have cast doubts on the validity of the theory. And the stock market crash of October 1987 raised further questions concerning the vaunted efficiency of the market. This edition explains the recent controversy and
reexamines the claim that it's possible to "beat the market." I conclude that reports of the death of the efficientmarket theory are vastly exaggerated. I will, however, review the evidence on a number of techniques of stock
selection that are believed to tilt the odds of success in favor of the individual investor.

The book remains fundamentally a readable investment guide for individual investors. As I have counseled individuals and families about financial strategy, it has become increasingly clear to me that one's capacity for risk bearing depends importantly upon one's age and ability to earn income from non-investment sources. It is also the case that the risk involved in most investments decreases with the length of time the investment can be held. For
these reasons, optimal investment strategies must be age related. Chapter Thirteen, entitled "A Life-Cycle Guide to Investing," should prove very helpful to people of all ages. This chapter alone is worth the cost of a high-priced
appointment with a personal financial adviser. Finally, the facts and figures in the book have been completely revised and updated. I survey the stock and bond markets at the end of the twentieth century and present a set of strategies that should successfully carry investors into the new millennium.

My debts of gratitude to those mentioned in earlier editions continue. In addition, I must mention the names of a number of people who were particularly helpful in making special contributions to the seventh edition. These include James Litvack, Gabrielle Napolitano, Abby Joseph Cohen, James Riepe, George Sauter, John Bogle, Leila Heckman, Will McIntosh, Keith Mullins, Jim Troyer, Andrew Engel, Mark Thompson, Steven Goldberg, Willy Spat, and David Twardock. Special thanks go to Walter Lenhard and Andrew 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 typing assistance. Ed Parsons and Mark Henderson
of W. W. Norton provided indispensable assistance in bringing this edition to publication. Patricia Taylor continued her association with the project and made extemely valuable editorial contributions to the seventh edition. My wife, Nancy Weiss Malkiel, made by far the most important contributions to the successful completion of the past three editions. In addition to providing the most loving encouragement and support, she read carefully through various drafts of the manuscript and made innumerable suggestions that clarified and vastly improved the writing. She even corrected several errors that had eluded me and a variety of proofreaders and editors over the first four editions. Most important, she has brought incredible joy to my life. No one more deserved the dedication of a book than she.

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