Genre: Nonfiction
The stock market is not really my thing. P/E ratios, IPOs, the EAFE index -- while those jumbles of letters may be some people's livelihoods, I've never understood them, nor made an effort to.
But at some point, I think most Americans with halfway decent incomes begin to realize that saving for retirement is a big deal, and that without some idea of how investing works, they stand to suffer a good deal of losses -- either flat-out monetary losses, or losses of opportunities to do better by themselves in the long run.
My faithful readers will note that I began to investigate the vagaries of the market with an earlier read, A Mathematician Plays the Stock Market. While I loved Paulos' book, it wasn't quite the primer on investing that I needed. Paulos had cited Random Walk in his volume, so I picked it up the last time I made a bookstore run.
Random Walk has become something of a classic in the investment field, though Malkiel's arguments are often rebutted by professional investors. Malkiel's premise is relatively simple: the stock market (encompassing both domestic equity and international equity) always gives excellent returns in the long run, but no one can determine if any one stock will give good returns. Therefore, in order to maximize your return while minimizing your risk, invest in a broad-based index fund (i.e. a fund that simply buys a large amount of stocks without buying and selling them all the time) and hold it until you need the money (i.e. for retirement or a home purchase). This is in contrast to advisers who advocate investigating specific stocks or heavily managed mutual funds -- in essence, attempting to "beat the market." Malkiel, citing several economic studies, shows that managed mutual funds mostly underperform unmanaged ones, and that there's no way of telling in advance who will be the few outperformers, so why gamble with your savings?
Now, if this were the entirety of the book, there'd be no reason for it to be upwards of 450 pages. However, Malkiel also runs through the major market "corrections" of the past four centuries (complete with snarky commentary), the tenets of the Efficient Market Hypothesis, the basic precepts of the two prevailing types of stock analysis, and, most helpfully, the types of investments that people should make, based on their age and risk tolerance. On all these counts, Malkiel does a superb job, combining hard-nosed economic analysis with funny, incisive (and often derisive) comments about everyone else in the business. See, for example:
Curiously, however, the broke technician is never apologetic. If you commit the social error of asking him why he is broke, he will tell you quite ingenuously that he made the all-too-human error of not believing his own charts. To my great embarrassment, I once choked conspicuously at the dinner table of a chartist friend of mine when he made such a comment. I have since made it a rule never to eat with a chartist. It's bad for digestion.
My only hesitation in recommending this book is the somewhat worrying fact that Malkiel is a member of the Vanguard Group, the group of leaders of the eponymous corporation that is best known for being the world's leader in the sale of -- you guessed it -- index funds, the very investment Malkiel recommends all people make. This is no way negates his advice (some may even see it as putting his money where his mouth is), but I wish he had been more forthcoming about it; he only reveals this affiliation about four-fifths of the way into the book.
Recommended? Yes: the lifecycle guide to investing alone is worth the cost of the book.
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