A Random Walk Down Wall Street
Encyclopedia
A Random Walk Down Wall Street, written by Burton Malkiel
Burton Malkiel
Burton Gordon Malkiel is an American economist and writer, most famous for his classic finance book A Random Walk Down Wall Street...

, a Princeton
Princeton University
Princeton University is a private research university located in Princeton, New Jersey, United States. The school is one of the eight universities of the Ivy League, and is one of the nine Colonial Colleges founded before the American Revolution....

 economist
Economics
Economics is the social science that analyzes the production, distribution, and consumption of goods and services. The term economics comes from the Ancient Greek from + , hence "rules of the house"...

, is an influential book
Book
A book is a set or collection of written, printed, illustrated, or blank sheets, made of hot lava, paper, parchment, or other materials, usually fastened together to hinge at one side. A single sheet within a book is called a leaf or leaflet, and each side of a leaf is called a page...

 on the subject of stock market
Stock market
A stock market or equity market is a public entity for the trading of company stock and derivatives at an agreed price; these are securities listed on a stock exchange as well as those only traded privately.The size of the world stock market was estimated at about $36.6 trillion...

s which introduced the random walk hypothesis
Random walk hypothesis
The random walk hypothesis is a financial theory stating that stock market prices evolve according to a random walk and thus the prices of the stock market cannot be predicted. It is consistent with the efficient-market hypothesis....

. Malkiel argues that asset prices typically exhibit signs of random walk
Random walk
A random walk, sometimes denoted RW, is a mathematical formalisation of a trajectory that consists of taking successive random steps. For example, the path traced by a molecule as it travels in a liquid or a gas, the search path of a foraging animal, the price of a fluctuating stock and the...

 and that one cannot consistently outperform market averages
Alpha (investment)
Alpha is a risk-adjusted measure of the so-called active return on an investment. It is the return in excess of the compensation for the risk borne, and thus commonly used to assess active managers' performances...

. The book is frequently cited by those in favor of the efficient market hypothesis
Efficient market hypothesis
In finance, the efficient-market hypothesis asserts that financial markets are "informationally efficient". That is, one cannot consistently achieve returns in excess of average market returns on a risk-adjusted basis, given the information available at the time the investment is made.There are...

. As of January 2011, there have been ten editions. A practical popularization is The Random Walk Guide to Investing: Ten Rules for Financial Success.

Investing techniques

Malkiel examines some popular investing techniques, including technical analysis
Technical analysis
In finance, technical analysis is security analysis discipline for forecasting the direction of prices through the study of past market data, primarily price and volume. Behavioral economics and quantitative analysis incorporate technical analysis, which being an aspect of active management stands...

 and fundamental analysis
Fundamental analysis
Fundamental analysis of a business involves analyzing its financial statements and health, its management and competitive advantages, and its competitors and markets. When applied to futures and forex, it focuses on the overall state of the economy, interest rates, production, earnings, and...

 in light of academic research studies of these methods. Through detailed analysis, he notes significant flaws in both techniques, concluding that, for most investors, following these methods will produce inferior results over passive strategies.

Malkiel has a similar critique for methods of selecting actively managed mutual funds based upon past performance. He cites studies indicating that actively managed mutual funds vary greatly in their success rates over the long term, often underperforming in years following their success, thereby reverting toward the mean
Mean
In statistics, mean has two related meanings:* the arithmetic mean .* the expected value of a random variable, which is also called the population mean....

. Malkiel suggests that given the distribution of fund performances, it is statistically unlikely that an average investor would happen to select those few mutual fund
Mutual fund
A mutual fund is a professionally managed type of collective investment scheme that pools money from many investors to buy stocks, bonds, short-term money market instruments, and/or other securities.- Overview :...

s which will outperform their benchmark index over the long term.

External links

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