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ARANDOM WALKDOWN WALL STREETThe Time-Tested Strategy forSuccessful InvestingBURTON G. MALKIELW. W. NORTON & COMPANYNew York London
CONTENTSPreface17Acknowledgments from Earlier Editions21Part OneSTOCKS AND THEIR VALUE1.FIRM FOUNDATIONS AND CASTLES IN THE AIRWhatlsa Random Walk?26Investing as a Way of Life TodayInvestinginTheory2830The Firm-Foundation Theory31The Castle-in-the-Air Theory33Howthe Random Walk Is to Be Conducted2.THE MADNESS OF CROWDSThe Tulip-Bulb CrazeThe South Sea Bubble38413735
CONTENTS8Wall Street Lays an EggAn Afterword3.48ssSPECULATIVE BUBBLES FROM THE SIXTIES INTO THENINETIES56The Sanity of Institutions56The Soaring Sixties57The New "New Era": The Growth-Stock/New-Issue Craze57Synergy Generates Energy: The Conglomerate Boom 60Performance Comes to the Market: The Bubble in Concept StocksThe Nifty Fifty68The Roaring Eighties70The Return ofNew Issues 70Concepts Conquer Again: The Biotechnology BubbleZZZZBest Bubble ofAll 73What Does It All Mean?75The Japanese Yen for Land and Stocks4.76THE EXPLOSIVE BUBBLES OF THE EARLY 2000sThe Internet Bubble79A Broad-Scale High-Tech Bubble 81YetAnother New-Issue Craze 84TheGlobe.com 86Security Analysts peak Up 88New Valuation Metrics 89The Writes ofthe Media 91Fraud Slithers In and Strangles the MarketShould We Have Known the Dangers? 96104Does This Mean That Markets Are Inefficient?7993The U.S. Housing Bubble and Crash ofthe Early 2000sThe New System of Banking 98Looser Lending Standards 100The Housing Bubble 101Bubbles and Economic Activity711049765
CONTENTS9Part TwoHOW THE PROS PLAY THE BIGGEST GAME IN TOWN5.TECHNICAL AND FUNDAMENTAL ANALYSISTechnical versus Fundamental AnalysisWhat Can Charts Teil You?110inThe Rationale for the Charting MethodWhy Might Charting Fail to Work?From Chartist to TechnicianIis116117The Technique of Fundamental AnalysisThree Important Caveats109118126Why Might Fundamental Analysis Fail to Work?128Using Fundamental and Technical Analysis Together6.130TECHNICAL ANALYSIS AND THE RANDOM-WALK THEORYHoles in Their Shoes and Ambiguity in Their ForecastsIs There Momentum in the Stock Market?Just What Exactly Is a Random Walk?Some More Elaborate Technical SystemsThe Filter System 141The Dow Theory 142The Relative-StrengthSystem 143Price-Volume Systems 143Reading Chart Patterns 144Randomness Is Hard to Accept 145136137141A Gaggle of Other Technical Theories to Help You Lose MoneyThe Hemline Indicator 146The Super Bowl Indicator 148The Odd-Lot Theory 149Dogs ofthe Dow 149January Effect isoAFew More Systems isiTechnical Market Gurus isiWhy Are Technicians Still Hired?154134134146
CONTENTS10AppraisingtheCounterattackImplications for Investors7.154157HOW GOOD IS FUNDAMENTAL ANALYSIS? THE EFFICIENTMARKET HYPOTHESIS159The Views from Wall Street and AeademiaieoAre Security Analysts Fundamentally Clairvoyant?ieoWhy the Crystal Ball Is Clouded1631. The Influence ofRandom Events 1642. The Produktion ofDubious Reported Earnings through"Creative"Accounting Procedures 1653. Errors Made by the Analysts Themselves 1684. The Loss ofthe Best Analysts to the Sales Desk, to PortfolioManagement, or to Hedge Funds 1705. The Conflicts oflnterest between Research and Investment BankingDepartments 170Do Security Analysts Pick Winners? The Performance of the MutualFunds174The Semi-Strong and Strong Forms of the Efficient-Market Hypothesis(EMH)182A Note on High-Frequency Trading (HFT)184Part ThreeTHE NEW INVESTMENT TECHNOLOGY8.A NEW WALKING SHOE: MODERN PORTFOLIO THEORYThe Role of Risk189190Defining Risk: The Dispersion of Returns191Illustration: Expected Return and Variance Measures of Reward andRisk 191Documenting Risk: A Long-Run Study194Reducing Risk: Modern Portfolio Theory (MPT)Diversification in Practice201196
CONTENTS9.11REAPING REWARD BY INCREASING RISKBeta and Systematic Risk210The Capital-Asset Pricing Model (CAPM)Let's Look at the Record209213219AnAppraisaloftheEvidence221The Quant Quest for Better Measures of Risk: Arbitrage PricingTheory223The Fama-French Three-Factor ModelASummingUp22522610. BEHAVIORAL FINANCE229The Irrational Behavior of Individual InvestorsOverconfidence232Biased Judgments235Herding239Loss Aversion243Pride and Regret 245Behavioral Finance and SavingsThe Limits to Arbitrage232246248What Are the Lessons for Investors from Behavioral Finance?1. Avoid Herd Behavior 2532. Avoid Overtrading 2553. If You Do Trade: Seil Losers, Not Winners 2564. Other Stupid Investor Tricks 257Does Behavioral Finance Teach Ways to Beat the Market?11.IS "SMART BETA" REALLY SMART?What Is "Smart Beta"?260260Four Tasty Flavors: Their Pros and Cons2621. Value Wins 2622. Smaller Is Better 2653. Momentum and Reversion to the Mean 2664. Low Volatility CanProduce High Returns 268Blended Flavors and Strategies270259252
CONTENTS"Smart Beta"Funds Flunk the Risk TestAppraisal of "Smart Beta" 271271How Well Have Factor Tilts Worked in Practice?Value and Size Tilts 274274Blended Hybrid Strategies277Research Afflliates Fundamental Index (RAFI)Equally Weighted Portfolio Strategies 280Other Factor Tilts281Low-Beta (Low-Volatility) StrategiesMomentum Strategies 281Implications for Investors278281282Implications for Believers in Efficient Markets284Capitalization-Weighted Indexing Remains at the Top oftheClass287Part FourA PRACTICA! GUIDE FOR RANDOM WALKERSAND OTHERINVESTORSA FITNESS MANUAL FOR RANDOM WALKERS AND OTHERINVESTORS291Exercise 1: Gather the Necessary Supplies292Exercise 2: Don't Be Caught Empty-Handed: Cover Yourself with CashReserves and Insurance294Cash Reserves294Insurance 295Deferred Variable Annuities297Exercise 3: Be Competitive—Let the Yield on Your Cash Reserve Keep Pacewith Inflation297Money-Market Mutual Funds (Money Funds)Bank Certificates of Deposit (CDs) 298Internet Banks 299Treasury Bills299298
CONTENTSTax-Exempt Money-Market Funds13300Exercise 4: Learn How to Dodge the Tax CollectorIndividual Retirement Accounts301RothlRAs 303Pension Plans303Savingfor College:As Easy as 529 304300Exercise 5: Make Sure the Shoe Fits: Understand Your InvestmentObjectives306Exercise 6: Begin Your Walk at Your Own Home—Renting Leads toFlabby Investment Muscles313Exercise 7: How to Investigate a Promenade through BondCountry315Zero-Coupon Bonds Can Be Useful to Fund Future Liabilities 316No-Load Bond Funds Can Be Appropriate Vehicles for IndividualInvestors 317Tax-Exempt Bonds Are Useful for High-Bracket Investors 317Hot TIPS: Inflation-Indexed Bonds 319Should You Be a Bond-Market Junkie? 320Foreign Bonds 321Exercise 7A: Use Bond Substitutes for Part of the Aggregate BondPortfolio during Eras of Financial Repression321Exercise 8: Tiptoe through the Fields of Gold, Collectibles, and OtherInvestments322Exercise 9: Remember That Investment Costs Are Not Random; SomeAre Lower Than Others325Exercise 10: Avoid Sinkholes and Stumbling Blocks: Diversify YourInvestment StepsA Final Checkup326327HANDICAPPING THE FINANCIAL RAGE: A PRIMER INUNDERSTANDING AND PROJECTING RETURNS FROM STOCKS ANDBONDS329What Determines the Returns from Stocks and Bonds?Four Historical Eras of Financial Market Returns334329
CONTENTSEra I: The Age of ComfortEra II: The Age of Angst335337Era III: The Age of Exuberance341Era IV: The Age of Disenchantment343The Markets from 2009 through 2014Handicapping Future Returns14.344345ALIFE-CYCLE GUIDE TO INVESTING349Five Asset-Allocation Principles3501. Risk and Reward Are Related 3512. YourActual Risk in Stock and Bond Investing Depends on the Length ofTime You Hold Your Investment 3523. Dollar-Cost Averaging Can Reduce the Risks of Investing in Stocksand Bonds 3554. Rebalancing Can Reduce Investment Risk and Possibly IncreaseReturns3595. Distinguishing between Your Attitüde toward and Your Capacityfor Risk 361Three Guidelines to Tailoring a Life-Cycle Investment Plan3631. Specific Needs Require Dedicated Specific Assets 3632. Recognize Your Tolerance for Risk 3643. Persistent Saving in Regulär Amounts, No Matter How Small,Pays Off 364The Life-Cycle Investment GuideLife-Cycle Funds366370Investment Management Once You Have RetiredInadequate Preparationfor Retirement371Investing a Retirement Nest EggAnnuities372The Do-It-Yourself Method37037237515. THREE GIANT STEPS DOWN WALL STREETThe No-Brainer Step: Investing in Index FundsThe Index-Fund Solution: A Summary382379380
CONTENTSISA Broader Definitionoflndexing 385A Specific Index-Fund Portfolio 388ETFs and Taxes 390The Do-It-Yourself Step: Potentially Useful Stock-Picking Rules393Rule 1: Confine stock purchases to companies that appear able to sustainabove-average earnings growthfor at leastfive years 394Rule 2:Neverpay more for a stock than can reasonably bejustified by afirmfoundation ofvalue 394Rule 3:It helps to buy stocks with the kinds ofstories ofanticipated growthon which investors can build Castles in the air 395Rule 4: Trade as little as possible 395The Substitute-Player Step: Hiring a Professional Wall StreetWalker398The Morningstar Mutual-Fund Information ServiceThe Malkiel StepA Paradox401405Investment Advisers407Some Last Reflections on Our WalkA Final Word400408410A Random Walker's Address Book and Reference Guide to Mutual Funds andETFsIndex413423
Wall Street Lays an Egg 48 An Afterword ss 3. SPECULATIVE BUBBLES FROM THE SIXTIES INTO THE NINETIES 56 The Sanity of Institutions 56 The Soaring Sixties 57 The New "New Era": The Growth-Stock/New-Issue Craze 57 Synergy Generates Energy: The Conglomerate Boom 60 Perform
