Andrew Allentuck

Friday, October 20, 2000

A Random Walk Down Wall Street
by Burton G. Malkiel
York Notes, 464 pages

A Random Walk Down Wall Street scandalized the investment community when it was first published in 1973. Burton G. Malkiel, an economist at Princeton University, demonstrated that stock prices are unpredictable and reflect the consensus of investors on any stock's prospects. Price volatility was just random noise, he said, and no investor could hope to beat the market by superior knowledge of any stock.

If true, the concept of randomness in price movements means that portfolio managers are useless and price charts are irrelevant. The wise investor would just buy index funds, save on high management fees, and hold on for the long term. Paul Samuelson, winner of the first Nobel Prize in economics, called Prof. Malkiel "the Dr. Spock of investments," and entire new fields of research into risk and return sprang up to investigate the phenomenon of randomness.

A Random Walk Down Wall Street is not the last word on the subject, for subsequent research into price movements using chaos theory, applications of signals analysis and other "rocket science" research has shown that core prices can be estimated even in very volatile markets. As well, diligent research can yield trading advantages, especially in small cap stocks that are not well followed by analysts and investors. But for a readable and, indeed, charming stroll through the statistics of price analysis, there is hardly a better place to start. A Random Walk Down Wall Street is a classic that every serious investor should read.