A "Random Walk" for investors

Marketplace Staff Dec 29, 2006

KAI RYSSDAL: Managing your finances is really important for you and for the people who make money off your money, from investment strategists to stock market gurus. Fancy titles, but who’s to say they really have the answers? Economist Burton Malkiel has another name for them, useless. You might have heard of his book. It’s called “A Random Walk Down Wall Street,” and it’s out in a new edition. Professor Malkiel, welcome to the program.

PROFESSOR BURTON MALKIEL: Nice to be here.
RYSSDAL: I’m sure you have a very precise economists’ definition for what a random walk down Wall Street is. To me it’s just, you know, sort of a nice stroll down by the Stock Exchange. What does it mean for you?

MALKIEL:
The random walk idea is that markets are essentially unpredictable. You can’t look at a past stock price and get a good prediction as to what it’s going to do in the future. Stock prices move when there is news, but true news is random. That is to say you can’t predict it from what happened in the past.

RYSSDAL:
You’re in your ninth edition of this book. The first one came out 35 years ago. Has the random walk changed? Has the market changed? What’s different now?

MALKIEL:
The basic message of the random walk, that basically what you want is a low expense index fund, that hasn’t changed a bit. But the instruments that are available for people for managing their portfolio, and this is essentially a book that tells individuals how they can manage their finances, all of those things are different and that’s basically what’s changed from edition to edition.

RYSSDAL:
Are there too many instruments out there? I mean, you know, you and I follow this stuff really closely. You, certainly more than I and it must be bewildering.

MALKIEL:
You’re right. I think it is bewildering. And the idea of the book is to tell the ordinary investor which of all of these instruments you ought to be concerned about, how to find, among this bewildering array of instruments, what are the low cost ones. The same instrument isn’t right for everybody. If I’m a 20-year-old beginning to invest for retirement, I want one sort of thing. If I’m a 70-year-old in retirement, living off my income, I want something else. So that’s part of the reason for the book, that as the instruments change, what I need to do is make sure that I tell people up to the moment what’s the right thing to have.

RYSSDAL:
Do you still say that you can’t really beat the market?

MALKIEL:
Absolutely. I’m more convinced of this than ever. And it is just remarkable in year after year, two-thirds of the so-called active managers are beaten by a simple low-cost index fund. And the one-third that do win out, they’re not the same ones from year to year. So that when you look over 10, 20 years, you can almost just count on the fingers of your hands the number of managers who have actually done better than the simple index fund.

RYSSDAL:
Burton Malkiel is a professor of economics at Princeton University. You probably know him better though as the author of a book called, “A Random Walk Down Wall Street.” It’s in its ninth edition in January. Professor Malkiel, thanks a lot for your time.

MALKIEL:
My pleasure. Thanks for talking.

RYSSDAL:
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