This is a book older than I am. Originally published in 1973 by a Princeton economist, it has been revised more than a dozen times. I first heard of it from a finance professor in my undergrad days and immediately read it. Burton Malkiel, the author, more or less states its impossible for the average investor the beat the market. The cover with a dart represents a quote from his book:
“A blindfolded monkey throwing darts at a newspaper’s financial pages could select a portfolio that would do just as well as one carefully selected by experts.”
Rightfully so, as he systematically illustrates the flaws in many stock valuation models in use today. Two such models are fundamental and technical analysis. We’ll have College of Weakonomics courses on these in the coming weeks.
The classic advice of paying off your mortgage early can be traced back to this book. Modern portfolio theory is all driven based on this book. Diversification is important for not only your risk profile but your age. Those Target Retirement mutual funds are basically this book. Diversify in many index funds, and slowly shift to fixed income as you approach retirement. Common sense to us now, but this kind of advice was groundbreaking in the 70s.
But he doesn’t just talk about the stock market. Random Walk also discusses the pitfalls and mistakes of many conservative investors. Since most people don’t understand and fear the stock market, when it comes to saving for retirement they’re content to keep everything in cash. This will destroy you, as even the most lucrative savings accounts fail to keep up with inflation. Once you retire and that income flow stops, you’ll be battling both the deterioration of your accounts from expenses and the deterioration of the dollar from inflation. Again this is common knowledge to the typical personal finance blog reader, but was news to many in the 70s.
This book could be considered the godfather of modern investing. All theories and models stem from this book. Now Malkiel can’t be given credit for all this, as most of it was likely taught to him. We can give the author credit for consolidating the knowledge into a book the layman can read.
The problem though, is despite multiple revisions, the book is no longer the best resource. There are mountains of books available now that teach the same lessons in fewer words. My paperback version is over 500 pages. Most of us get bored after 100. If you’re truly committed to learning the ins and outs of the stock market and investing, there is no better place to start than this book. If you’ve heard about this book from all your friends and want to read it so you’ll know what they’re talking about, again its probably a good idea. If you’re only interested in learning more about investing, spend a couple hours browsing Trent’s book reviews over at The Simple Dollar. He does a review each week and most of the time they are personal finance oriented. You’ll find a few there worth checking out from the library.
You’ll like this book if:
Your retirement portfolio consists mostly of index funds.
You don’t understand how the stock market works.
You’ll hate this book if:
The Efficient Market Hypothesis means nothing to you.
You day trade and you know what you’re doing.
You run a hedge fund.
 By The Weakonomist |
The Weakonomist is the founder of Weakonomics. Clicking the picture of the puppy will tell you more about him. If you like what you're reading consider subscribing to the blog, following him on Twitter, and checking out the related posts below. Please consider a donation if you really enjoy Weakonomics. |
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