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A Random Walk Down Wall Street: The Time-Tested Strategy for Successful Investing

Burton G. Malkiel · 3 HN comments
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Amazon Summary
A Best Book For Investors Pick by the Wall Street Journal ’s “Weekend Investor” Whether you’re considering your first 401k contribution, contemplating retirement, or anywhere in between, A Random Walk Down Wall Street is the best investment guide money can buy. In this new edition, Burton G. Malkiel shares authoritative insights spanning the full range of investment opportunities―including valuable new material on cryptocurrencies like bitcoin, and “tax-loss harvesting”―to help you chart a calm course through the turbulent waters of today’s financial markets.
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> a. One-day

> b. One-Week

> c. One-Month

Yikes! I know it's fun, but you're never going to make money investing this way. Your daily/hourly buys and sells on scottrade will never beat the institutional investors.

Here's the obligatory mention of A Random Walk Down Wall Street [0] if you want to learn why.

TL;DR: Put your money in an index and keep it there _forever_. You'll make more money and retire sooner than your day-trader friends.


I'd start with a couple of great books you should be able to get from the library:

   * The Four Pillars of Investing:
   * Are You a Stock or a Bond:
   * A Random Walk Down Wall Street:
All of these point to fundamentals about investing:

   * The first step is to identify your risk tolerance and goals. That's way more important that the specific vehicles of investing.
   * Unless you are a professional investor, it is highly unlikely you'll beat the professionals (and not likely even then) so broad diversification is a good idea.
Investing in an index fund consistently gives returns of about 5-10% a year. This turns out to be a LOT of money in the long run (1.1 ^ 30 = 20x).

Trying to time the market is a bad idea. Picking individual stocks is a bad idea.

This is assuming your main goal is returns on your investment. Picking individual stocks or even 30 stocks is basically gambling.

Really recommend reading "A Random Walk Down Wall Street":

It depends on which index. The Dow Jones is an exceeding poor index and a good actively managed fund will out perform it easily.

The Dow does not take into account market cap or float, and when a security comes off of it at $5 a share and a new one goes in at $105 per share, then the index jumps $100 in value.

The S&P is better, but managed funds are usually better.

While it's true the Dow doesn't take into account market cap because it is a price weighted index, it is not true that removing a $5 security and adding a $105 one jumps the index $100 in value.

Every index has a divisor, which acts to preserve the return. The general calculation for an index level is Level=MCAP/Divisor. With the Dow, the MCAP is simply the sum of the prices instead of the sum of all MCAPS for the individual securities. When you drop one security and add another, the divisor is calculated such that it offsets the change in MCAP. In this way, when the index opens the next day it opens at the exact same level as the previous close and then the real time feeds kick in and update based on the gap up/down of each security in the Dow. The same basic logic applies to all top level indices. The calc changes for gross/net returns, currency variants, hedge calcs, etc. But the same principal applies that there must be a way to preserve the day over day return so that adding and removing securities doesn't throw off the actual index levels and returns.

Your 401k and other investment accounts that report performance do the same thing behind the scenes - particularly 401k. With a 401k you are consistently adding money to your investment pool and placing small trades to obtain more shares of a pool of securities. This influx of money doesn't artificially inflate your personal return for the year because the way the calculation is done is very similar under the hood to how an index is calculated.

Interesting that you claim that, since I usually only hear the contrary (actively managed funds don't perform better and the fees are too high).

Does anyone have specific data on this? Does anyone

I work in this industry. We have detailed reports on damn near everything, including private hedge funds and how they perform. 80-85% of any active management or financial advisory services have not beat low cost index investing over the long haul. The top 15% or so can and do, but the vast majority of the active investments players (that 80% or so) don't make enough to beat passive investment once their fees are taken into account and an appropriate passive benchmark is used. Meaning, if they are actively investing for their client using only US securities and products, we use a major US benchmark to compare against. If they are global, Asia-Pac, Dev/emg, etc. we use one of those to compare against so we are looking at apples to apples. A lot of times they will simply invest in a high growth emerging market and tell their clients that they are beating the S&P 500. Yeah, of course you are. But you aren't beating the relevant emerging markets growth products.
What are those top 15%? Is it the same 15% each year? :) Does it include big players that anyone can sign up for like Fisher or Fidelity?
90% of managed funds have underperformed the S&P over the last 10 years and studies have shown the funds previous performance has little to no impact on future performance.

I'm so tired of these types of comments on HN that say investing in individual stocks is like gambling. It's such a tired piece of advice. Don't invest more than say, 5%, in an individual company, but choosing a selection of high quality companies that you believe in is not in any way like going to the roulette table.
It depends on the time-frame you plan to invest. If it's a short time frame, investing in individual stocks can be OK.

There's just so many variables that go into the price that something that causes the stock to go up/down 20% can be completely unforeseen.

A broad market index won't have these weird fluctuations. Almost every single market strategy underperforms broad market indices in the long run.

Even hedge funds that outperform the S&P in one period perform average in the next period. In other words, past performance of funds has no impact on future performance. On average hedge funds picking individual stocks consistently underperform compared to broad market indices.

> it's a short time frame, investing in individual stocks can be OK.

And then your gains are cut by transaction costs, opportunity costs and short term gains.

The issue I have with your statement is not that you're guaranteed in any way to beat the market, but saying that investing in individual stocks is gambling. It just isn't true.

Again, if you have no more than 5% of your portfolio in an individual stock then a 20% drawdown on that one stock is not going to significantly hurt you.

People should feel free to decide for themselves if they want to spend the time to actively invest vs throwing everything into an ETF and no one should be shaming them into thinking it's akin to going to a roulette table in Vegas.

As someone in tech, I've done quite well investing in high quality tech companies like Apple, Netflix, Amazon, and Nvidia over the years. I keep my 401K in a broad index fund but enjoy actively investing a part of my wealth.

> As someone in tech, I've done quite well investing in high quality tech companies like Apple, Netflix, Amazon, and Nvidia over the years.

I feel like I have a number of coworkers who make investments like this, that haven't really been burnt on this because of the bull market. And because they know tech better than most, that's what they focus on, and it becomes a huge sector risk, even though no more than 5 percent is invested in any particular symbol. If five years from now we learn that someone in big tech has been cooking the books ( that could lead to a sector wide dip for a variety of reasons, far worse than a 5 percent drop.

What it comes down to for individual investors is that diversification is at odds with well researched investing. You just don't have the time to pour over 100 quarterly 10-Qs, build sales forecasts, or predict next year's return on the 10y treasury bond. It can be a fascinating hobby, and while I have a small trading account with the IEM, all my real money goes into VOO/AGG.

I don’t take investing so seriously like pouring over financial statements outside of skimming through earnings reports. I don’t live everyday worrying Tim Cook is committing massive accounting fraud. I invest in companies I understand, use/like, and reasonably trust, and it’s worked out well for me. There may come a time the whole market crashes again, but my gains are far above the index fund over the last 10 years, and if I need to derisk I will make that decision at a later time.

Again, I just thinking screaming “anything except index funds is stupid gambling and irresponsible” is untrue. I also think those who become truly wealthy in life necessarily have to do things that the average person is unwilling to do, like invest understanding there’s a risk involved.

> I don’t take investing so seriously

Then how do you know you aren't over paying for stocks? Your plan is to buy high and sell higher?

> it’s worked out well for me

My unvested RSUs have more than doubled in value over the past year, and ESPP has done just as well lately. The market has worked out great for everyone, especially those of us in high tech.

> if I need to derisk I will make that decision at a later time.

To me this reads as 'I will sell when the market drops hard enough to make me anxious.' A ton of institutional investors (think pension funds and university endowments) did exactly that, and it made them worse off in the long run. David Swensen calls that institutional strategy out as 'buy high and sell low.' IMO, buying into a down market is the real step the average person is unwilling to do, even though it's incredibly easy implement: sell off your winners and buy more of your losers.

If you have something more complicated in mind, I just am not ready to believe someone unwilling to bother calculating the present value of forecasted future earnings is bothering with looking at their Sharpe ratio and deciding 'welp, time to buy some VIX to offset this risk.'

> Again, I just thinking screaming “anything except index funds is stupid gambling and irresponsible” is untrue.

Even if you don't accept the premise (I don't[1]), doesn't mean active investors are a priori smart. I have yet to speak with anyone upset by the index investing philosophy I consider prepared.

[1]: There are clearly people who make a living doing this who dig far beyond financial statements. Random example I know of from a lecture given at Yale by a trader ( if you can stomach the umms and ahs) reading Bond contracts ("indentures") and looking for companies that were likely to delay financial statements and owed bondholders par immediately. One such notable source of delayed financials was backdated options, and this exact accounting irregularities even affected the tech giant you mentioned, back in 2007. You may recall another facet of this story from HN favorite 'Why I did not go to jail' ( as this was widely practiced at the time.

If you have income and you're young, you can afford to take risks. Big tech is disproportionately represented in SPY/QQQ so if we're in a massive bubble it's all going down anyway.

I consider active investing to be a hobby. I get a kick out of seeing earnings reports come in from companies I'm invested in. Again, I've dramatically outperformed SPY over 10 years and the gains have nearly secured my retirement as someone in his early 30s.

I occasionally hedge with SPY puts or gold calls if I think we are in an actual correction. If it's sustained I would do that over selling.

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