Burton G. Malkiel’s best seller, A Random Walk Down Wall Street, makes an argument for the efficient market hypothesis and argues that individual investors have no better chance of beating the stock market than a monkey throwing darts at a dart board. His advice is for investors to just buy into funds that replicate the overall markets returns. This advice will ensure an individual of moderate returns over an extended period of time, which Malkiel claims is the best on average that individuals can do.
Burton Malkiel defends his claims by providing evidence that no other strategy has, nor will ever consistently beat these index funds that track the overall stock market as a whole. While I agree with this assertion, because as he stated, “that any truly repetitive and exploitable pattern that can be discovered in the stock market and be arbitraged away will self-destruct.” This is because as more and more people find out about this technique, such as the Dogs of the Dow, the January effect, or the Monday Afternoon pattern, then the gains will be wiped away as more people try to exploit these patterns. This will lead to investors bidding up the prices until there is no gain to be made from these trading techniques.
One point that I contest with of Malkiel’s is that all of the studies he uses to support his data incorporate trading fees which essentially wipe out the possible gains for individual investors. With the creation of websites such as Robinhood that offer $0 trades, it would be very interesting to conduct these same studies, but without the trading fees to see if his theory about individual investor never (or hardly ever) being able to beat the market as a whole. Removing these expenses will save the users tons of money and may change the results of some studies claiming that beating the market is all luck.
The main premise behind Malkiel’s book is to help individual investors maximize their potential returns of saving their money, and there is some very good advice that should be followed by all investors (such as diversification and determining appropriate risk allocation), but I do believe that there are ways in which individuals can beat the market. Investing is a gamble, and all investors must understand that they could lose some or all of their money, but by following some of the techniques Malkiel outlines, anyone can start adequately preparing for their retirement. This book is one that I recommend anyone interested in investing reads before doing so.