Book Review: A Random Walk Down Wall Street

A Random Walk Down Wall Street (2003, 8th ed.) by Burton G. Malkiel

This book is considered a classic in the investing world. It is divided into four parts. Part 1 provides a general introduction to two views of investing (the "firm-foundation" and "castle-in-the-air" theories) and a fascinating historical account of major bubbles in stock market history, including the dot-com bubble (and its pop) back in 2000-2002. Part 2 provides an interesting – and occasionally funny – critique of fundamental analysis (choosing stocks based on valuation measures) and technical analysis (choosing stocks based on chart patterns), pointing out that the former is problematic because it is difficult to get accurate quantitative information and the latter is just BS (I tend to agree). Part 3 introduces Modern Portfolio Theory, which is all about measuring risk, and it addresses criticisms of the Efficient Market Hypothesis, which is the idea that stock prices quickly come to reflect whatever is known about a stock, so it is pointless to try to "beat the market." The discussion of risk was insightful, but I found some of the counterarguments to criticisms of the EMH to be rather weak and based on tenuous "what if" scenarios. Part 4 provides a how-to guide for investing, covering different types of investments (which was very boring), presenting a life-cycle approach to investing (which I think is too conservative, especially for young investors), and advocating the buying of index funds (the rationale being that if you cannot beat the market, then you might as well just match it). I disagree with much of this part of the book – based on what I've read elsewhere, I think one can construct a much better investment portfolio.

Note: I read this book in November 2011.