Appreciation: Burton Malkiel

For longer than I can remember,* I've been recommending Burton Malkiel's A Random Walk Down Wall Street, to students interested in finance--particularly to students who are so misguided as not to enroll for my very own law school basic finance class. I just lately noticed that it is now in its Ninth edition; I don't suppose I have read it since, maybe number four, so I figured I'd better give it a look-see to find out whether it still held up.

Verdict: with qualification, yes. It's accessible and witty and jam-packed with common sense. Whatever its shortcomings, I still can't think of a better way to ease newbies into investing.

It does show some signs of age: my intuition is that the "chartist/technical" school investing is not nearly as powerful as it was a few years ago. Malkiel's demolition of technicians is a pleasure to watch and enjoy, just like a 28-car pile up at the stock car track. But at this point, it might be using a cannon to kill a pea. On the other hand, Malkiel clearly keeps up: he's got a good, brisk summary of some of the high-saliency findings from the new behavioral finance, although he doesn't seem to approach it with the same phyrronism that he has applied to almost every other vogue in financial analysis.

Perhaps sadly also, he doesn't seem to have caught up with "alpha" or "chasing alpha," but I strongly suspect he would approach this topic with the same withering contempt he visited on "the tronics" and "the nifty-fifty" and "the dot-coms" and all the other hubba hubba manias that have put us through so many cycles of boom and bust. And I think he might have done more to point out how far we have moved away from "classical" finance theory (MPT, CAPM, the whole nine yards)--yet how utterly lacking we are in any plausible doctrine to replace it.

My real qualification is one that is hardly his fault: he wrote before the current uproar. I do wonder what he might say about an 8,000 Dow and 10 percent unemployment and credit paralysis. My first thought is--oh, he'd have to revise. But on second thought, maybe not. One of the fascinating things about Malkiel all the way through is that for such a nihilist, he's such an optimist. Malkiel's world is cluttered with booby traps: gimmicks, frauds and self-delusions. Yet his vice remains: go ahead and invest anyway. Don't expect a quick fix; don't be fooled; don't think you can outwit the forces of evil. Diversify your portfolio; flirt with the fundamentalists; be prepared to hang in for the long run and don't panic.

But whether I got him right or not, I can only hope he's working on a tenth. And my recommendation to students still stands.
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*I thought I had first read it in law school. But I took my only law school finance course in 1969, and Malkiel's first edition didn't come out until 1973. So much for meomory.