Thesis: While Malkiel’s book gives an in-depth look at the basics of the world of financial markets, readers should not treat it as a substitute for professional financial advice.
Today’s stock market is, to the average American, an incomprehensible mess of quasi-sophisticated terms, incomprehensible charts, and constant breaking news updates. As Malkiel aptly puts it, “the stock market [is] treated like a sports event with a pre-game show, a play-by-play during trading hours, and a post-game show to review the day’s action”. This dramatization of the markets, along with the wealth of information readily available on the internet, leads many investors to get caught up in the excitement and make misinformed purchases based on the castle-in-the air theory. Malkiel’s book equips an investor to think rationally amongst all the madness, providing an overview of the various theories and techniques which investors subscribe to (or used to subscribe to), while including real-world examples of the instances when the public succumbed to the siren’s song. If the world of investing was the world of mathematics, then A Random Walk Down Wall Street would be like a course in basic algebra: not quite the most fundamental building blocks of theory nor the most advanced, but arguably the most crucial.
Burton Malkiel’s writing style is perfect for the type of book he wrote – a book meant to be understood by a reader coming in with absolutely no prior experience. He keeps the technical concepts to a bare minimum, periodically dropping jokes while still embedding graphs, charts, and tables that perfectly illustrate the logic he is arguing for (mostly concerning speculative bubbles). He makes absolutely no assumptions about the reader’s prior knowledge, providing brief explanations of basic financial concepts ranging from fundamental and technical analysis to the fact that risk is correlated with returns. However, I think this incredibly approachable style is somewhat of a pitfall for the book – some readers may find that they are overly confident and ready to jump in to the market, just as those who think watching CNBC and perusing Bloomberg.com might prepare them for investing.
Malkiel champions indexed mutual funds and ETFs, broadly diversified funds that allow an investor to capture the market’s returns while minimizing risk, which is certainly sound advice. He consistently returns to the efficient market hypothesis, which I interpret as his way of constantly reminding the reader how hard it is to beat the market – also sound advice. And he lays out wise principles in part four of the book (which, by the way, contains the vast majority of the information in the book that is truly useful to the average investor – though part one is a very entertaining read) such as how risk tolerance will vary by investor, how diversification between fixed-income securities and equities is crucial, and how important it is to start saving as early as possible. But even if a person were to diligently read this book cover to cover and use it as their investment bible, I would not trust them to manage any significant portion of my wealth based on that alone – so why should a person trust themselves after reading just this book? The bottom line is that while Malkiel’s advice is excellent, it is not a replacement for professional financial advice. For example, the book claims that one should hold on to larger cash reserves as they grow older, but does not get any more specific than that, because one’s investment needs vary so much from person to person. In reality, financial goals and needs are incredibly diverse, and cannot be grouped into a few brackets of different portfolio holdings based on age and income. Malkiel has quite a pessimistic view of financial advisers and I think he dismisses them with too much ease. While it is true that their fees can be high, any adviser worth his/her salt will not push their clients into funds for personal benefit. And the personalized advice they can provide, not only on investments but on legal and tax matters, is well worth the fee.