The latest book review here at Richer by the Day is A Random Walk Down Wall Street by Burton Malkiel.

In this book, the author systematically disproves virtually all methods of predicting future stock performance.  He goes beyond discrediting both technical and fundamental analysis to include more exotic methods as well.  He shows how consistently beating the average return of the market is rare, if not impossible.  Mr. Malkiel presents a reasonable and believable case for efficient market theory.  Rather than prove that the market always sets the price correctly, he shows that although discrepancies often exist in the market, few methods are able to divine these discrepancies without the benefit of hindsight.  Were unsustainable prices present during the internet bubble?  Surely.  But could you have anticipated their fall at the time?  Probably Not.

As to why some fund managers appear to be good at picking stocks, the author attributes most of it to the volume of managers out there and the survivorship bias.  Namely, if only those who find success stay in business, those with track records will tend to have reasonable results.  The catch is that having past success did nothing for their likelihood of future success.  I liked the example he gave of a room full of students flipping coins.  If you started with 100 students and only kept those who flipped heads each time, after several rounds you might conclude that those still standing were good at flipping heads.  Of course, they were just as likely to flip tails on the next flip as any other participant.

After dismantling the prospects of beating the market through any stock picking method, Mr. Malkiel could have left you in a state of hopelessness.  Rather, he presented index investing as an alternative.  While novel when the book was first published, this method has gained incredible acceptance and practice since that time.  That can largely be credited to the book itself.  I also enjoyed how this latest version of the book was sufficiently updated to include recent events.  It seemed as though it was just written even though many of the ideas came from earlier versions.  Few other authors take such care when releasing new editions, leaving their work outdated.  Not so in this case.

A Random Walk Down Wall Street even recognizes that although index investing may be the most prudent strategy to follow, it lacks the excitement and interaction of other methods.  As such, it offers some suggestions for speculation in other methods including limits to those efforts.  This book may leave you depressed or excited about investing in the stock market depending on your personality, investment goals, and opinion of your stock picking skills.  It can at once be both humbling and empowering as a result.  Nearly all investors could benefit from reading this book whether to confirm their beliefs in the randomness of the market or offer a sobering alternative view.

I’ll be parting with my copy of A Random Walk Down Wall Street on October 10th. For details on being considered, see my free book giveaway post.