The Only Investment Book You Need

If you read just one investment book, make it “A Random Walk down Wall Street” by Burton G. Malkiel, an emeritus professor of economics at Princeton University. I picked up the most recent edition of this book at my favourite (and actually pretty much only) source of reading matter, the local public library.

First published in 1973, this book is geared to American investors but most of the advice is applicable regardless of where you live. It is well and clearly written, and covers most of what you need to know about the markets. Malkiel propounds the random walk theory, which states that future directions cannot be predicted on the basis of past history. “Taken to its logical extreme, it means that a blindfolded monkey throwing darts at the stock listings could select a portfolio that would do just as well as one selected by the experts.”

In other words, if you want to invest in stocks, you are better off buying a broadly-based index mutual fund with a low management expense ratio that paying higher fees to buy a mutual fund managed by professionals.  He cites compelling evidence based on an investment of $10,000 in 1969, which grew to more than $700,000 in 2013 if it were put into an S & P Index fund, versus growing to more than $500,000 in an actively managed fund. (Of course, you say, who had $10,000 to invest in 1969? I started working full time in the 1970s, and $10,000 a year was a decent starting salary then.)

Needless to say, the random walk theory is not very popular among Wall Streeters, who hope to convince you to invest with them because of their proprietary knowledge. If you know what is good for you, avoid doing this. Malkiel acknowledges that a lot of us like to buy individual stocks because it is fun, and isn’t totally opposed so long as our portfolio is properly diversified and contains mostly large-cap stocks with a long history of dividend payment and good prospects for earnings growth.

One of the most valuable parts of this book is Malkiel’s long history in or studying the markets. I’m not sure how old he is, but he writes of being in grad school in 1962, so he is probably in his 70s. He writes about events I had almost forgotten, such as the enormous dot com meltdown of the early 2000s.when a stock like Amazon traded as low as $5.51 per share. And who can forget Nortel Networks?  This Canadian stock reached $143 a share before vanishing off the charts a few years later. (I know, I had a few shares.)

While Malkiel is a stock market guy, he also acknowledges the importance of bonds, real estate and other such investments in constructing a balanced portfolio. He agrees with most other experts that the percentage of a portfolio in fixed income instruments should increase with an investor’s age. It is hard to make a convincing case for long-term bonds with today’s very low interest rates, so investors may wish to consider things such as Guaranteed Investment Certificates. Bonds were a terrific investment from the 1980s to the present, but today you have to assume a lot of risk to get a decent yield from them.

I enjoy reading investment books, including those by people such as Suze Orman and Jim Cramer, TV superstars. But if you’re looking for a solid introduction to investing or just want to brush up, I would heartily recommend Malkiel’s book.


Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s