Question

Write a report on the book "A Random Walk down Wall Street" by Burton G. Malkiel. At least 3000 words. Describe the concepts in the book?

Answer 1

Burton G. Malkiel wrote this book A Random Walk Down Wall Street in 1973. This was a few years after the 20th century’s first computer technology bubble popped. The latest edition comes after the dot.com bubble pop. This was the last of the 20th century’s technology bubble. Investors hurt by the first bubble can be excused because they didn’t have this book back then. But, it’s shocking how this era investors didn’t heed to what Malkiel taught. This book is a must on every investor’s shelf. And, all investors must consult this book before taking an investment decision. Many investment books aren’t reliable. It’s because their authors are mainly selling the book. But, Malkiel doesn’t want to sell. Instead, he’s a teacher having the discipline of a real financial economist. His writings are as rich as an expert journalist. We highly recommend this book A Random Walk Down Wall Street.

“IT IS NOT HARD, REALLY, TO MAKE MONEY IN THE MARKET.”

This summary Will Help You Learn

• The realities of investment life.

Take-Aways

• It’s not that tough to earn money in the share market.
• Investors often neglect the lessons of the past.
• It’s tough to fight the emotional attraction of a likely bonus
• In the end, the market will find real value or something near it.
• A stock can’t have more value than the cash its investors make.
• Investors must benefit from tax-favored investment plans and savings.
• The ideal investment strategy is indexing.
• Many market variances, for example, the January effect, aren’t playable.
• Avoid paying for stock more than its actual worth.
• The market is not predictable. But, investors are better than speculators in the long run.

A true investing classic. In A Random Walk Down Wall Street, Burton G. Malkiel grabs your hand while strolling down Wall Street. He explains that two paradigms dominate the debate of price in a stock market context: fundamental vs. technical. Afterwards, he runs through the academics’ perception of the stock markets. During Burton and the reader’s stroll, you’ll be presented with examples of manic periods on the financial markets, the pitfalls investors need to navigate around, lessons and rules for successful behavior on Wall Street.

Define a “Random Walk”

So, what does the saying “stock prices are a random walk” mean? Well, it says that short-term shifts in price are not predictable. This frustrates Wall Street professionals. It’s because people pay them for their vast knowledge of the market moves. But, the past is apparent. Investors who avoid predicting the market shifts do better than speculators. Hence, investment theories are critical. Two of the most key investment premises include:

Firm-foundation theory — There’s an intrinsic value of stocks. This can be computed by discounting and adding future dividends. Warren Buffett and economist Irving Fisher swore by this theory.

Castle-in-the-air theory — Greater fool theory is its another name. As per this theory, successful investing depends on predicting the crowd’s mood. Hence, an investment is worth anything people are ready to pay. And, people are not very logical.

There’s enough proof to suggest that market acts illogically. Sometimes, prices are way over their real values. And, sometimes the prices fall very low. Guessing such irrationality is tough. And, profiting from this is more robust.

History’s Most Famous Market Manias:

1. Tulipmania — 17^th century Holland suffered from this mania. The prices of tulip bulbs were insanely high. So much so that people even mortgaged their houses to buy them. The market came down in 1637.
2. South Sea Bubble — Gripped 18^th century UK. There was a craze for the attractive but worthless South Sea Company. This mania peaked and fell-out in 1720.
3. Roaring Twenties — America’s most crazy speculative events began in 1923. This ended with a crash in 1929 which led to the Great Depression.
4. Soaring Sixties — The first tech stock bubble was during 1960s. Speculators ran toward any issue which had “electronic” in its name. This age also saw a speculative affair with concept stocks and MNCs.
5. Nifty Fifty — Some 50 solid growth stocks took Wall Street by storm. These included IBM, Avon, Xerox, and the likes. This trend sent their P/E ratios to double digits. But, all this crashed.
6. Roaring Eighties — A new issue of mania came in 1983. The joy of the biotech craze and LBO boom got over in 1987.
7. The Japan Bubble — The Imperial Palace in Tokyo had real estate worth more than all land in California. This was during some time in 1989. The Japanese share market had a value of 45% of the world’s market. It crashed in 1990.
8. Internet Bubble – The NASDAQ was led by high-tech firms in the late 90s. The market tripled before it crashed.

The academic paradigm: Algorithms, Greek symbols and other nonsense
Let’s start with the so-called nonsense paradigm, namely that of the academics. Burton explains that a bunch of Ph.D.s have agreed on a theory dubbed the efficient market. It dictates that price and value is at any given point one and the same. According to this view, there’s only one factor that can explain outperformance risk. Risk in the academic universe is made-up of volatility and diversification. The academics try to convince you of this gibberish by packing it into a fancy-titled theory: the capital-asset pricing theory. Now, as is perhaps implied, I regard this paradigm as foolish, so let’s move on to more meaningful paradigms!

The technical paradigm: Graphs, patterns, movements and castles-in-the-sky
Technical analysis is the tool of the speculators who believe they can to some degree foresee the future based on patterns in stocks’ price movements. Burton explains that people in this camp attempt to make a science of stocks’ ups and downs by defining theories and systems for various patterns. For instance, if a stock has reached a new low and suddenly soars 5%, the stock is in an uptrend according to The Filter System (and you should strike at the opportunity according to the system). Burton goes on to explain that technical analysis is based on the greater fool theory, which he explains as such: “An investment is worth a certain price to a buyer because she expects to sell it to someone else at a higher price. In this kind of world, a sucker is born every minute. Any price will do as long as others may be willing to pay more.”

Does technical analysis work? Numerous studies reach a unanimous conclusion: no! Burton puts it as such : “The results reveal that past movements in stock prices cannot be used reliably to foretell future movements. The stock market has little, if any, memory.” Does this mean that technical analysis is just another hoax paradigm just as the academics’ Greek symbols and algorithms? According to Burton, yes. But there’s a glimpse of hope! He proclaims that the castle-in-the-sky theory belongs to this paradigm, and that may offer value to investors. The theory determines that investors should evaluate whether a stock’s ‘aura’ and narrative may create excess optimism regarding its future and thus shape a consensus that there’s no upper limit for the stock’s performance. How do you profit from such castle-building? “The successful investor tries to beat the gun by estimating what investment situations are most susceptible to public castle-building and then buying before the crowd.” Easy as that, right?

Worthless Investing Theories

Be very careful of these familiar but useless investing theories:

1. Filters— Any share which shifts up from a low or vice versa is on a trend that’ll continue. Filter strategies don’t do better than the buy-and-hold when considering transaction costs. Brokers swear by them, though, as they produce commissions.
2. Dow theory— Buy when market beats its last high. And, sell when it falls below its previous low. Evidence suggests it’s a money-losing trick.
3. Relative strength— Buy stocks which beat the market. And, sell the ones who underperform. This technique isn’t any better than buy-and-hold after transaction costs.
4. Price-volume— Gathers investor emotions from price rise or price falls. Trading becomes necessary because of price-volume methods. Investors will earn more if they buy and hold. The returns aren’t worth the transaction costs.
5. Chart patterns— Computer tests show that chart patterns don’t have any predictive power. These patterns include diamonds, head-and-shoulders, etc.
6. Hemline indicator— If hemline increases, so will the share prices and vice versa. Stock prices and hemlines have some link. But, there isn’t much predictive power.
7. Super Bowl indicator— NFL win leads a bull run. Or AFL brings in the bears. Though this has happened. But, it was a coincidence. There’s no justification for seeing it as a predictor.
8. Odd-Lot theory— Layman can’t afford whole 100-share round lots. Hence, they buy odd lots. As they are often wrong, buy when they sell. And, sell when they buy. There’s no proof this works. Besides, trading costs make it costly.
9. Dogs of the Dow— Buy Dow shares having the highest dividend returns. Even the person who created this trick admits it doesn’t work.
10. January effect— Buy at the end of the year. At that time prices of small stocks fall. And, sell when the year starts because prices rise that time. But, trading expenses cancel this out.
11. Weekend effect— Says that shares have negative yields Friday to Monday. Hence, don’t buy on Friday. Instead, buy on Monday noon.
12. Momentum investing— Momentum investors drive trends. They hope that trend is their friend. It’s because they think the market will keep on doing what it just did. But, in reality, momentum investors perform worse than buy-and-hold investors.

Fundamental Analysis

So technical analysis is of no use. Is fundamental analysis any good? This analysis belongs to firm-foundation school. These analysts believe in examining data about a firm. Such data gives a fair prediction about its future earnings. Hence, the analysts think of it as a reasonable estimate of the underlying value. But it’s not possible to predict a firm’s future confidently. A firm’s previous earnings don’t give sound estimates of its future earnings. Past performance can’t work as a guide for future performance. Plus, a historical review of earnings is upsetting. Short-term estimates of analysts were even less sound than long-term estimates. Reason? There’re many:

1. Experts aren’t that expert— They aren’t perfect. But their self-confidence even beats their imperfection.
2. Stuff happens— Estimates can’t forecast accidents, deregulation, terrorism or changes in raw material prices.
3. Creative accounting— The data they’re seeing could be fraudulent.
4. Incompetence— Analysts are many times lazy, careless and unskilled.
5. Corruption or conflict-of-interest — Analysts aren’t calm truth seekers. Companies pay them just because they can sell securities. The ones who can’t play along can’t last.

Index and Diversify for Efficiency

Overall, fundamental analysis is also useless. So, where does the investor stand now? Remember one thing – the market is more-or-less efficient. Hence, share prices show much crucial information about a firm’s future. They also reflect the possible direction of the market. Markets respond fast to new information. This is an important factor that drives share price moves. Even Warren Buffett and Benjamin Graham said that individual investors should buy index funds. They must avoid picking stocks or investing with a fund manager. The market isn’t entirely efficient. Hence, people fall prey to manias. Data may not reach stock prices as fast as the efficient-market advocates think. But, overall, one can’t beat the market. It’s almost impossible.

Still few investors become rich by selling and buying shares. So, what do they do which others don’t? Its answer is – they take the risk. The only way one may have high yields is by taking risks. A study by Ibbotson Associates showed that returns are linked with risk. Common shares belong to the maximum-return asset group. They also carry the highest risk. As per Modern Portfolio Theory, you can spread your funds over a range of risky securities. And, the overall risk of your portfolio will be less than that of any security. Plus, you’ll still get high returns. Diversification is the key here. It gives the lowest risk with a high return.

Diversification

Place your apples in as many baskets as you can. A globally diverse portfolio has less risk than an entirely US portfolio. From 1970-2002, the lowest risk and highest return were of a portfolio with 76% US and 24% non-US stocks. But, the advantages of global diversification are reducing now. It’s because developed global and US markets are moving more in tandem. But, growing market changes and currency distinctions can disturb market situations. Hence, diversify across asset groups as well besides common shares. Two other asset groups are government bonds and REITS. Through REITs, you can buy shares in real estate. These don’t move in line with the stock market. Inflation is a blessing for bond investors. Hence, go for inflation-safe bonds. But, tax law is not good for them. So, use such bonds in tax-protected plans.

The best an investor can do to succeed in the stock market is diversifying. Investors must also lower their costs. Also, try not to outguess others about future prices. This is because even experts fail in this. Be a passive investor who has a diverse index. This way you’re likely to perform better than a person investing in actively managed funds.

We agree with the author about investors are much better in the long run as compare to the speculators. The vast knowledge of the author explained the theory of firm foundation, intrinsic values for the stocks, dividends, discounting, and computed investment. The famous market manias were from the 17^th century to the 19^th century. The author mentioned eight market manias including Tulipmania, south sea bubble, Nifty Fifty, the Japan bubble, roaring eighties, roaring twenties, soaring sixties, and internet bubble. In the book, we found some worthless investing theories that must be learned by the investors and these theories were filters, Dow Theory, relative strength, price volume, chart patterns, hemline indicators, super bowl indicators, odd lot theory, dogs of the dow, January effect, weekend effect, and momentum investing. We agreed with the ranges of risk and securities; the diversification was the cause of low risk as mentioned by the author “the indexing strategy is the one I most highly recommend.”

A Random Walk Down Wall Street Quotes

“It is not hard, really, to make money in the market.”

“The indexing strategy is the one I most highly recommend.”

“A biblical proverb states that ’in the multitude of counselors there is safety.’ The same can be said of investment.”

“Of course, earnings and dividends influence market prices, and so does the temper of the crowd.”

“Although stock prices do plummet, as they did so dis­as­trously during October 1987 and again during the early 2000s, the overall return during the entire twentieth century was about 9% per year, including both dividends and capital gains.”

“As long as there are stock markets there will be mistakes made by the collective judgment of investors.”

“Nev­er­the­less, one has to be impressed with the substantial volume of evidence suggesting that stock prices display a remarkable degree of efficiency.”

“It should be obvious by now that any truly repetitive and exploitable pattern that can be discovered in the stock market and can be arbitraged away will self-de­struct.”

“The ’cycles’ in the stock charts are no more true cycles than the runs of luck or misfortune of the ordinary gambler.”

“The mystical perfect risk measure is still beyond our grasp.”

“Can you continue to expect a free lunch from in­ter­na­tional di­ver­si­fi­ca­tion? Many analysts think not. They feel that the glob­al­iza­tion of the world economies has blunted the benefits of in­ter­na­tional di­ver­si­fi­ca­tion.”

“It is clear that if there are exceptional financial managers, they are very rare, and there is no way of telling in advance who they will be.”

The fundamental paradigm: Analyses and intrinsic values
Let’s park the castle-in-the-sky theory a moment while we layout the fundamentalists’ perception of the market. Investors pledging to the fundamentalist school believe that any financial asset has an intrinsic value. Said value can be estimated through various methods, i.e. by employing a Discounted Cash Flow (DCF) analysis. Burton focuses on a dividend model in the book, but the premise is the same regardless of the model one applies: buy when the asset is undervalued, and sell when its price reaches or exceeds its intrinsic value. Burton dubs this approach the ‘firm-foundation theory’.

According to the firm-foundation theory, there are but four factors that influence a business’ intrinsic value: 1) the expected growth rate, 2) the expected dividend payout rate, 3) the degree of risk, and 4) interest rates. Factor 1, 2 and 4 are presented in Why are we so clueless about the stock market?, but Burton has an interesting view on point 3), which merits a walk-through. If you’ve read Against the Gods, you may remember that risk is an illusory concept. Burton , however, says only two elements go into the fundamentalists’ perception of the term: respectability and stability. The former concerns a business’ perceived respectability among investors. All else being equal, highly regarded, well-known blue-chip companies are less risky than relatively unknown businesses. The latter circulates around a business’ ability to ensure stable earnings through various cycles, crises and recessions.

This way of considering risk may seem a bit self-evident. I find the perspectives interesting though I personally navigate around risk by ensuring a margin of safety between price and intrinsic value while I usually try not to pay too much of a premium relative to book value.

In chapter 12, four rules are presented that might assist the investor in picking stocks. It’s in this context that we’ll revisit the castles-in-the-sky theory, cf. rule three below:

• Rule 1: Limit your stock purchases to businesses that seem able to sustain an above-average earnings growth for at least five years.
• Rule 2: Never pay more for a stock than what can be justified based on an analysis of the business’ intrinsic value.
• Rule 3: It helps to acquire stocks in businesses with the type of stories that make investors build castles in the sky.
• Rule 4: Trade as little as possible.

The rules don’t seem to require much elaboration, but rule 3 merits some reflections. I recently read The Everything Store, which portrays Amazon’s impressive growth adventure. At the time of writing, Amazon’s market value flirts with $570 billion, which translates into a P/E of 299 and a P/BV of 29. How? In my opinion, the stock is trading ever-higher based on the narrative that Amazon will conquer the world through eCommerce. Who doesn’t want to own a piece of the business that all consumers buy everything at? Offhand, it appears investors have build a castle in the sky – though I have no way of telling if it’s inflated or justified.

Lastly, regarding castles-in-the-sky and buying into various narratives, remember Burton’s maxim: “Stupidity well packaged can sound like wisdom”

Abstract :

• The author illuminates why the academics’ view on the stock markets is nonsense. He then presents the thesis behind technical analysis as well as why no study can prove that investing based on this approach is profitable: “The results reveal that past movements in stock prices cannot be used reliably to foretell future movements. The stock market has little, if any, memory.”
• Yet, he illustrates how fundamental analysis can be advantageously combined with an element of technical analysis, the castles-in-the-sky theory. He then proposes four rules that can aid investors in their quest to beat the market when adopting a fundamentalist approach to the financial markets.

According to the author, the basic secret of investing is committing to stock investment in the long term or diversifying investments in case of short-term investments. The author justifies his assertions by using historical testimonies and expounding on them by using personal experiences. The book has four sections with respective chapters that elaborate on various concepts of investing. The book report will provide the author’s main idea and the insights gained. An analysis will show that Malkiel’s book offers an avenue that allows investors to make sound investment decisions by balancing their investment expectations with options available to them.

Part One: Stocks and their Value

This part entails the first four chapters that introduce the reader to the world of investments. The part mainly discusses concepts of asset valuation by using theoretical foundations. The author mainly uses the firm-foundation theory and the castle-in-the-air theory to expound on asset valuation. The first chapter is “Firm Foundations and Castles in the Air” and it offers an introduction to investments. It explains that the firm foundation theory argues that an investor should make investments on the basis of the actual value of the proposed investment. The author uses a real-life example that a person wishing to invest in Coke should base the investment decision on the product’s parent company, the Coca-Cola Corporation. The castle-in-the-air theory asserts that an investor should make investments as a response to actions of the masses. For this reason, the theory argues that an investor usually makes more returns by following the majority who invests based on current trends or based on the foundations of a firm. The chapter concludes that both theories are right in different investment situations. The explanations of the author of the two theories offer a background for the author to critique them in the following chapters.

The second chapter “The Madness of Crowds” explains historical financial occurrences that prove that actions of the masses have significant investment repercussions. Examples of such occurrences include the Tulip-Bulb Craze, the South Sea Bubble, and the tulipomania. In the three instances, the market expanded in a speedy way and led to the overvaluation of assets. After some time, values of the assets returned to their normal valuation after one or a couple of years. A graphical analysis of the three instances showed that by the end of the overvaluation hype the values of the assets returned to the same values as before the hype. The chapter portrays that investors who just follow the masses blindly tend to lose heavily in the market. The inability of investors to resist the urge of the masses makes them vulnerable to adversities of the market.

Chapter three explains the stock valuation between the 1960s and the 1990s. The chapter offers a continuation of the craze that the market experiences. The author uses various examples in the stock market to expound on the modern version of the extremity of markets. He expounds on the multiples of price earnings that formed the base of stock trading at the time. The author also expounds on the roles of underwriters in the issuance of new securities, especially their roles in misleading investors. The misleading happened despite investors having access to the guidelines offered by the United States Securities and Exchange Commission. For instance, the stocks in the 1980s were overvalued. The scenario confirms the assertion of the author in the second chapter that such situations continue to recur. Another example offered by the author is the obsession of investors with blue chip companies in the 1970s. By 1980, the values of the stocks had returned to their normal prices. The cases show how firms often manipulate information to increase their value so that they can attract investors. The author concludes that manipulation is inevitable because even though organizations such as the SEC provide the guidelines, they can do nothing to prevent investors from parting with their money. By offering real examples and enlightening historical occurrences, the author remains authoritative and ensures that the reader grasps the real impacts of the masses in making investment decisions.

Chapter four explains the internet bubble that sufficed in the late 1990s. The author argues that the public’s obsession with the internet was fuelled by other bubbles similar to the historical ones covered in the previous chapters. For instance, the author cited the IPO mania that prompted the bubble in the 1960s. Similar instances could be seen in the internet era. The main message of the author is that people tend not to learn from past experiences. After the rise of the internet, small investors gained a platform for investments and firms gained a platform for competing with larger firms. Moreover, people became more interconnected. Due to the excitement of the availability of a new platform of trading, people engaged in stock trading by the use of brokerage firms. As a result of overcrowding, people lost money due to the eventual overvaluation and the return to normal prices. In fact, only brokers benefited.

This part highlights significant historical influences of the mass mentality on investments. The main point of the author is that markets remain perfect. The assertion means that even if an imperfection comes up, the market will find a way to go back to its normal status. One of the pieces of advice one gets from the part is that investors need to combine both their intellect and curiosity to succeed in investments. The influence of crown activities was also enlightening. The provision of historical examples that led to the overvaluation of assets enables the reader to grasp the author’s main idea. The examples show that an emotional approach without much consideration towards stock investments can be detrimental for investors in the long run. One of the interesting insights from the examples that the author offers is that investors never seemed to learn. All through the 1960s to the late 1990s, economic bubbles would always recur. There would be some hype created that would in turn entice people to spend more money on stocks. The hype occurred even after authorities such as the SEC warned investors.

The above cases remind me of the 2007/2008 economic depression. The scenario was caused by a similar bubble, only that this time it was a housing bubble. The decade ending in 2006 saw prices of houses drastically rise, thus prompting homeowners to refinance their homes due to the availability of adjustable-rate mortgages extended by lenders. Due to the availability of mortgages, people could access loans at interest rates lower than market rates. However, after 2006 people could not refinance their loans because house prices started falling and interest rates rose at the same time. In effect, financial institutions could not recover their loans extended. The situation kick-started the depression that had adverse effects on investors. The situation in 2007/2008 shows that the market has not yet learned about adverse impacts of following the multitude blindly.

Part Two: How the Pros Play the Biggest Game in Town

This part makes up the next three chapters. The chapters mainly deal with fundamental and technical analysis techniques. Chapter five tries to expound on the extent of the efficiency of the market. It focuses on the elaboration of the technical and fundamental analysis of financial markets. Technical analysis entails studying trends in market prices of assets and then applying historical trends to predict their future prices. The method uses tools such as trend lines and charts. Fundamental analysis entails analysis of the condition of a business by examining its financial records, the market in which the business operates, and the competition. The chapter does not go into much detail about the theories with the next three chapters serving this purpose.

The sixth chapter expounds on the technical analysis concept. The author asserts that technical analysis concentrates on identifying correlations. For this reason, the author seems to discredit the technique by arguing that testing the data of stock prices over time does not necessarily lead to the correct prediction of the stock prices. The author cites that the above aspect of the technique makes it spurious. He even uses a humorous example of finding a correlation in the average hemline length in fashion. He uses the example to explain that looking solely at the charts robs off one’s opportunity to see the broader picture, meaning that there would be a high probability of poor judgment. The author also touches on the random walk theory and states that the theory employs random measures to process random data. He goes on to compare the theory with a humorous example of the use of coin flips to determine future prices of stocks. The author uses more humorous examples to disregard the theory and the technical analysis because of the theory limitation.

Chapter seven concentrates on the fundamental analysis concept. Malkiel seems to support the fundamental analysis. The support, as he argues, arises because the concept bases itself on logical judgment when admitting data for consideration. Another reason the author prefers the fundamental analysis is that the technical analysis only focuses on the stock price, while the fundamental analysis focuses on the worth of the stock. Despite the support for the theory, the author finds it weak as well. The author provides situations where fundamental analysis can have flaws. The examples include random events such as the 9/11 attacks, the consideration of flawed data from firms, and poor analysis. The author also asserts that financial experts are no better than investors. He states that they only have an edge because they can access more information from companies.

The author’s information on stock valuation is very insightful. Although I had some knowledge of the two techniques of stock valuation, I had not deeply analyzed them to an extent of identifying their weaknesses. However, the author’s argument convinced me of the flaws of the systems. I enjoyed humorous examples offered because it was a light way of learning about the techniques. The part of the book also offers a lot of lessons when it comes to stock trading. The first lesson is that one should purchase stocks if their expected growth of earnings is above the market average. Moreover, prospected growth should entail a period of more than five years. The second lesson is that it is too risky to purchase multiple stocks whose prospected future growth has been discounted.

The last and the most significant lesson is that an investor should consider whether an asset possesses the likelihood of attracting masses to invest in them. The last lesson means that logic is the key when considering a stock purchase. Another interesting conclusion from the understanding is that I have come to question the roles of financial advisors in aiding investors making investment decisions. The author cites that the only difference between them and investors is that they have more information. Prior to reading the book, I viewed experts as a haven and the best avenue for investors to make right investment decisions. After reading this part of the book, I realized that experts might not be significantly different from investors. I find great sense in the claim because some of the historical bubbles came up since investors had more trust in experts than in the authorities. However, despite gaining the knowledge, I partly disagree with the author’s claim because the fact that experts have needed information means that they are in a better position to make sound decisions.

Part 3: The New Investment Technology

This part entails the next three chapters of the book. The section concentrates on the modern portfolio theory that entails combining assets with different risk levels to create a positive returns diversified portfolio. Harry Markowitz came up with the theory in the 1950s, making him win the 1990 Nobel Prize. Chapter eight introduces the modern portfolio theory by asserting that it is essential for investors to diverse their investments and at the same time minimize their risks to obtain positive returns. According to the author, the risk of an asset is a significant determinant of the nature of returns. It is worth noting that the standard deviation of the stock is usually the measure of risks. The author cites that risks are inevitable irrespective of the nature of diversification. The argument of the author portrays that he partly agrees with the theory.

Chapter nine expounds on the theory by explaining ideas highlighted in chapter eight. The outstanding addition to the previous chapter’s ideas is introduction of the beta factor. The author introduces the factor while explaining the Capital Asset Pricing Model (CAPM). On the basis of the model, the author argues that investors should avoid diversifiable risks because they do not have premiums. The author also argues that an investor should attain more returns by investing in high-risk assets. However, the risk should be systematic. The premium aspect leads to the introduction of the beta factor. The author explains that the beta factor explains how a stock behaves in the stock market. Specifically, it measures volatility of an asset as compared to the whole market. On the one hand, theoretical application indicates that the price of a stock with a higher beta value will rise at a higher rate than other stocks in case of a bull period. On the other hand, its price will decrease at a higher rate in case of a bear market. However, after introducing the beta concept, the author takes an unprecedented stand by claiming that beta is not a sufficient measure of the relationship between the risk and returns.

Chapter ten introduces the concept of behavioral finance. The concept entails application of human cognitive and emotional concepts in making investment decisions. The author argues that behavioral traits such as being overconfident and overreacting often have an influence on investors’ decisions. After explaining the concept, the author concludes that most choices based on personal biases do not reap intended rewards in the long run. Malkiel argues that the common sense aspect of personal biases has a chance of providing a logical judgment on investments that may prove fruitful. Some of the common sense ideas include inner motivation of investors to resist investing in pricey assets in the long run and the desire to avoid overtrading. Another possible aspect of common sense is that an investor should only get rid of stocks that portray a trend of losing value.

Chapter eleven entails the author providing a summary of his opinions given in previous chapters. Some of the assertions include that the market is fairly efficient and in most instances corrects discrepancies when they occur. The main attraction point is the author’s use of Benjamin Graham’s argument that investors should always invest in the long-term value stocks. The author does not seem to endorse the Graham’s argument and he goes to the extent of justifying his position. He asserts that in the long run the trends of growth and value stocks do not run parallel to market trends. However, he partly endorses the Graham’s argument by stating that value stocks often tend to perform better during extremities such as bubble and economic depression.

After reading the part, I gained more information on the importance of beta. However, after the author providing a lot of information about its importance in determining the risk of an investment, it was surprising for the author to disagree with the beta factor. The author argues that particular differences in the stocks make beta more ineffective. Despite the surprise, I appreciated his insight because it provided a platform for me to read more about the relationship between beta and risk and returns. On the concept of behavioral finance, I have come across real applications of the author’s argument that personal biases affect individual investment decisions. The inner thought that there is an opportunity to make money can urge an individual to make rash decisions. Moreover, the thought of a possible loss can influence similar decisions. The significance of personal biases in investing has led to the creation of various notions in the modern investment world. Some investors have the tendency to disregard the efficient market hypothesis and endorse unproven beliefs. An example is the January effect when people tended to think that stocks perform well in January. Despite their unproven status, beliefs may make an investor invest heavily during the month. In effect, such an investor may end up experiencing losses.

Part Four: A Practical Guide for Random Walkers and Other Investors

This part aims at giving the reader an insight into the practical side of investing. The part also offers advice to investors by affording them strategies that they can use to choose their investment portfolio. Chapter twelve offers investors advice on how to start an investment venture. The author encourages stock investors to ensure that they have emergency funds available in case their investment decisions lead to losses. Moreover, the author argues that investors should consider investing in “insurance” investments such as bonds and real estate investments. He argues that ordinary shares and real estate investments provide a viable option for investment. He concludes with the assertion that prior research is vital for investors in coming up with the best portfolio.

Chapter thirteen mainly deals with the author’s opinion on the better choice between stocks and bonds. The author argues that an investor should not entirely rely on the past performance of a stock to predict its future performance. However, he states that the past performance partially influences its future value. The author believes that investing in stock in the long run offers more returns than in bonds due to the elimination of risks. Moreover, he asserts that investing in stocks in the long run may provide the needed safety to fight inflation. However, Malkiel insists that the period cannot be shorter than a decade. He states that a shorter period than a decade is too random and investors do not have a choice but to invest in risky stocks. The assertion means that investors who intend to venture into the short-term investments have to choose between risks and adopt the one that they feel comfortable to carry.

Chapter fourteen entails the author insisting that investors willing to commit their resources for more than a decade should commit themselves to stocks. He also insists that it would be better for short-term investors to concentrate on a diversified portfolio that include bonds. The author also advises short-term investors to consider retaining some of their resources as cash to cover any case of emergency. The chapter offers guidance on how investors can approach the market. Despite offering the above options, Malkiel encourages investors to venture into long-term investments. He advises investors to consider venturing into long-term stocks as a way of saving a retirement fund.

Chapter fifteen is the last one in the section and the entire book. Apart from providing a summary of the book, it goes into the specifics of investing. The author argues that an investor does not have to perform an extremely detailed analysis to make an investment analysis. Instead, the author encourages investors to venture into an index fund. He encourages investors intending to purchase individual stocks to venture for the long term instead of trading them. Moreover, he asserts that investors should concentrate on stocks that have a record of good performance. Concerning managed funds, the author has reservations about them. He asserts that they may not be an advisable option because they may have misleading information. The also advises investors to purchase stocks that create positive stories about their potential to improve their value.

After reading the last part of the book, I came to get the picture of intentions of the author. The first intention is to prove that the market efficiency hypothesis offers a realistic guidance in the stock market. The second aim was to reconcile market efficiency and perceptions of the market towards economic bubbles. The last aim of the author was to identify various ways of analyzing the stock market, highlight their weaknesses, and apply lessons from their weaknesses in offering investment advice to investors. The fourth part culminates his aims by combining strengths of different investments theories and techniques and avoiding their weaknesses to come up with a hybrid investment decision-making guideline.

In conclusion, investors ought to read the Malkiel’s text. The book is organized in well-thought sections that cover aspects that entail financing progressively. Reading all the parts enriches a reader with information necessary in making appropriate investment decisions. The author came up with investment theories and techniques and highlighted their roles in investments. He aimed at offering the best financial advice. It is undeniable that the author believes in a partly efficient market and he justifies it by giving out real-life historical examples.

The book has a lot of lessons for all investors. The main lesson is that an investor should have the courage to make investment decisions instead of relying solely on financial experts. Moreover, investors should apply logic in the decision-making. With the author analyzing crucial investment theories and concepts and then offering their critique, his aim is to communicate that none of them is efficient. For this reason, a hybrid way of the approach that entails picking strengths of the theories and techniques would be the preferable way to approach investments.

Personally, I have learned that caution is the key to approaching investments. Moreover, I have learned that over-ambition or moving along with the crowds can be detrimental in some instances. I have also learned that having long-term investments is a preferable way of saving in the long run. The book also teaches that if an investor chooses to invest for a short-term period of fewer than ten years risks are inevitable. For this reason, diversification is the key. Due to the above lessons, investors, whether they believe in the efficiency or the market or not, need to read the book to expand their investment knowledge.