Malkiel - A Random Walk Down Wall Street

473 Pages·2004·4.89 MB·English

Page3
A Random Walk Down Wall Street
Including A Life-Cycle Guide ToPersonal Investing
BurtonG.Malkiel
ChemicalBankChairman's
ProfessorofEconomics
AtPrincetonUniversity
Page4
Copyright©1999,1996,1990,1985,1981,1975,1973
byW.W.Norton&Company,Inc.
Allrightsreserved
PrintedintheUnitedStatesofAmerica
ThetextofthisbookiscomposedinZapfEllipticalwiththedisplaysetinBerling.
DesktopcompositionbyJustineBurkatTrubey
ManufacturingbytheHaddonCraftsmen,Inc.
Library of Congress Cataloging-in-Publication Data
Malkiel, Burton G.
A random walk down Wall Street : including a life-cycle guide
to personal investing / Burton G. Malkiel.
p. cm.
Rev. ed. of: a random walk down Wall Street. c1996.
Includes bibliographical references and index.
ISBN 0-393-04781-4
1. Investments. 2. Stocks. 3. Random walks (Mathematics)
I. Malkiel, Burton G. Random walk down Wall Street. II. Title.
HG4521 .M284 1999
332.6—dc21 98-50671
CIP
W.W.Norton&Company,Inc.,500FifthAvenue,NewYork,N.Y.10110
http://www.wwnorton.com
W.W.Norton&CompanyLtd.,10CopticStreet,LondonWC1A 1PU
2 3 4 5 6 7 8 9 0
Page 7
CONTENTS
Preface 13
Acknowledgments from Earlier Editions 17

Part One
Stocks and Their Value
1. Firm Foundations and Castles in the Air 23
What Is a Random Walk? 24
Investing as a Way of Life Today 26
Investing in Theory 28
The Firm-Foundation Theory 29
The Castle-in-the-Air Theory 31
How the Random Walk Is to Be Conducted 33
2. The Madness of Crowds 35
The Tulip-Bulb Craze 36
The South Sea Bubble 39
The Florida Real Estate Craze 45
Wall Street Lays an Egg 46
An Afterword 53
3. Stock Valuation from the Sixties through the Nineties 55
The Sanity of Institutions 55
The Soaring Sixties 57
The New "New Era": The Growth-Stock/New-Issue Craze 57
Synergy Generates Energy: The Conglomerate Boom 61
Performance Comes to the Market: The Bubble in Concept Stocks 69
The Sour Seventies 73
The Nifty Fifty 73
The Roaring Eighties 76
The Triumphant Return of New Issues 76
Concepts Conquer Again: The Biotechnology Bubble 78
Page 8
The Chinese Romance with the Lycoris Plant 80
Some Other Bubbles of the 1980s 81
What Does It All Mean? 85
The Nervy Nineties 85
The Japanese Yen for Land and Stocks 85
The Internet Craze of the Late 1990s 90
A Final Word 94
4. The Firm-Foundation Theory of Stock Prices 95
The "Fundamental" Determinants of Stock Prices 96
Two Important Caveats 103
Testing the Rules 106
One More Caveat 108
What's Left of the Firm Foundation? 111

Part Two
How the Pros Play the Biggest Game in Town
5. Technical and Fundamental Analysis 117
Technical versus Fundamental Analysis 118
What Can Charts Tell You? 119
The Rationale for the Charting Method 124
Why Might Charting Fail to Work? 126
From Chartist to Technician 127
The Technique of Fundamental Analysis 128
Why Might Fundamental Analysis Fail to Work? 132
Using Fundamental and Technical Analysis Together 134
6. Technical Analysis and the Random-Walk Theory 138
Holes in Their Shoes and Ambiguity in Their Forecasts 138
Is There Momentum in the Stock Market? 140
Just What Exactly Is a Random Walk? 142
Some More Elaborate Technical Systems 145
The Filter System 146
The Dow Theory 146
The Relative-Strength System 147
Price-Volume Systems 148
Reading Chart Patterns 148
Randomness Is Hard to Accept 149
A Gaggle of Other Technical Theories to Help You Lose Money 150
Page 9
The Hemline Indicator 151
The Super Bowl Indicator 153
The Odd-Lot Theory 153
A Few More Systems 155
Technical Market Gurus 155
Why Are Technicians Still Hired? 159
Appraising the Counterattack 160
Implications for Investors 163
7. How Good Is Fundamental Analysis? 165
The Views from Wall Street and Academia 166
Are Security Analysts Fundamentally Clairvoyant? 166
Why the Crystal Ball Is Clouded 170
1. The Influence of Random Events 171
2. The Creation of Dubious Reported Earnings through "Creative" Accounting 172
Procedures
3. The Basic Incompetence of Many of the Analysts Themselves 174
4. The Loss of the Best Analysts to the Sales Desk or to Portfolio Management 177
Do Security Analysts Pick Winners? The Performance of the Mutual Funds 178
Can Any Fundamental System Pick Winners? 186
The Verdict on Market Timing 187
The Semi-strong and Strong Forms of the Random-Walk Theory 190
The Middle of the Road: A Personal Viewpoint 193
Part Three
The New Investment Technology
8. A New Walking Shoe: Modern Portfolio Theory 199
The Role of Risk 200
Defining Risk: The Dispersion of Returns 201
Exhibit 201
Expected Return and Variance: Measures of Reward and Risk 201
Documenting Risk: A Long-Run Study 204
Reducing Risk: Modern Portfolio Theory (MPT) 206
Diversification in Practice 211
9. Reaping Reward by Increasing Risk 220
Beta and Systematic Risk 221
Page 10
The Capital-Asset Pricing Model (CAPM) 224
Let's Look at the Record 229
An Appraisal of the Evidence 232
The Quant Quest for Better Measures of Risk: Arbitrage Pricing Theory 234
A Summing Up 237
10. The Assault on the Random-Walk Theory: Is the Market Predictable after All? 240
Predictable Patterns in the Behavior of Stock Prices 242
1. Stocks Do Sometimes Get on One-Way Streets 243
2. But Eventually Stock Prices Do Change Direction and Hence Stockholder Returns 244
Tend to Reverse Themselves
3. Stocks Are Subject to Seasonal Moodiness, Especially at the Beginning of the Year 247
and the End of the Week
Predictable Relationships between Certain "Fundamental" Variables and Future Stock 249
Prices
1. Smaller Is Often Better 249
2. Stocks with Low Price-Earnings Multiples Outperform Those with High Multiples 251
3. Stocks that Sell at Low Multiples of Their Book Values Tend to Produce Higher 253
Subsequent Returns
4. Higher Initial Dividends and Lower Price-Earnings Multiples Have Meant Higher 254
Subsequent Returns
5. The "Dogs of the Dow" Strategy 258
And the Winner Is . . . 259
The Performance of Professional Investors 259
Concluding Comments 267
Appendix: The Market Crash of October 1987 270