A Random Walk Down Wall Street

Book Essay

In the book “A Random Walk Down Wall Street”, the author holds an opinion that current market is closed to efficient and people are wasting their time to find arbitrary opportunities in the market. The author believes that people are hard to beat the market and impossible to be consistently profitable.

After introducing some big events happened in history of world’s stock markets, the author starts to bring in his “random-walk” theory from reviewing the widely-used investing techniques. The author states that the market professionals are using two techniques to invest their money, technical analysis and fundamental analysis. However, through lots of researches and studies, neither of them has been implemented to outperform the market average performance. Both of them have their own flaws.

For the people who rely on technical analysis, they are using the pattern of historical prices to predict future trend of the price. The author, however, argues that the past prices of an asset have no effect on the future price. In other words, the correlation of historical prices and future prices is near zero.  In addition, the author also states that as more and more people using the similar techniques on predicting price trends, the technical analysis itself will be depreciated and lose its power. On the other hand, the author also points out that the fundamental analysis also fail to work. He argues that precisely predicting future cash flow of a company is almost impossible. Even if we can estimate the true intrinsic value of a company, the stock price may not perform its “true value”. When we buy an undervalued stock, the stock price might still go down.

Then, the author shows us the “new walking shoe”-- modern portfolio theory, such as diversification on risk, mean-variance frontier and CAPM model. The author also introduces the topic of behavioral finance, which tells us irrational mistakes made by individual investors, including overconfidence, biased judgments, pride and regret etc.

Finally, the author gives advises of a person’s life-cycle investments. He suggests that to avoid a big risk, one should put more weight of his investment into the stock index, such as S&P 500 or some other ETFs. In addition, the author suggests that investing in bonds is also a good option. He recommends four types of bonds, zero-coupon bonds, no-load bond mutual funds, tax-exempt bonds and US TIPS. Lastly, the author suggests that the person should recognize his capacity for risk before making investment decision. Making a good assets allocation is a key to reduce portfolio risk. People should always believe that it is almost impossible to beat the market and consistently make a large amount of money over the market returns.