A Random Walk Down Wall Street

Hi Folks

This book, A Random Walk Down Wall Street , is among Joel's recommended read. I am just wondering if anyone has picked up the latest copy and has any comments to share?

Farid
Monday, January 19, 2004

I read the previous edition and thought it was great. I don't see how the fundamental concepts would change after the .com bubble, but it's on my wish list anyway.

www.MarkTAW.com
Tuesday, January 20, 2004

I bought it for my father in law.

Synopsis:

Invest in index stock funds and forget about being a market watcher/day trader, the odds are heavily against you.  This is proven over and over by graph and charts of past performance.

Mike
Tuesday, January 20, 2004

Brownian motion and finance?  Hmmm... sounds interesting.

Matt
Tuesday, January 20, 2004

Yeah basically. The guy who wrote it innovated index funds back in the 70's I believe. He's also a big proponent of different kinds of investmenting for different segments of your life.. You know, riskier when you're younger, investing 101 really, but still probably a better lesson than 99% of the investing books out there.

www.MarkTAW.com
Tuesday, January 20, 2004

I have read the book.

It is a lot better than most of the finance textbooks out there.

Still, whenever I hear anyone tell me they can show me how to make money on the stock exchange, I reach for my gun, and the baseball bat!

Investing in index funds is just as silly as following some other investment strategy. It is no panacea to the ultimate problem that remains... how do you predict the future?

Until people admit that there is no difference between investing on the stock exchange, and heading over to the race track, folk will continue to get fleeced.

Tapiwa
Tuesday, January 20, 2004

The best part of the book is the first few chapters which describes every bubble of the last fifty years.  Since the 1960s there has basically been a "new investment buzz" (bubble) every few years (the Electronics boom, the Youth Consumer boom, the BioEngineering boom, etc).  This book should be required reading for every investor. 

IanRae
Tuesday, January 20, 2004

> Investing in index funds is just as silly as following some other investment strategy. It is no panacea to the ultimate problem that remains... how do you predict the future?

Nope -- you've over-reached, now, with the "just as silly" phrase.

It's rational to want to invest in long-term, equity-based investments, because the data we have suggests that you will ultimately have more money if you do so.

Index funds are one of the best vehicles for such investments because they have low management fees and the strategies are extremely simple.

"Random Walk" is a great exposition of this point of view.

Portabella
Tuesday, January 20, 2004

>Until people admit that there is no difference between investing on the stock exchange, and heading over to the race track, folk will continue to get fleeced.

Tapiwa - are you suggesting we should not invest our money at all?  Do you follow your own advice?

I know many people who do not invest their money, and after 30 years they have a few grand in the bank and that's it.  Compare that with the people that put money in an IRA or 401(k) etc that have millions after 30 years.  I also know people who invested and lost it all.

But I know of no one that never invested and has millions.  I'd guess lottery winners & heirs. 

nathan
Tuesday, January 20, 2004

I think you're missing the point. If you're in your 20's or 30's you have 30 or 40 years to invest your money. In the long run, the Dow does move foward

http://finance.yahoo.com/q/bc?s=^DJI&t=my

and if you look at it over the span of 20-30 years rather than 5 you'll see what I mean. By the time you're 5-10 years from retirement, you should have moved the bulk of your investments into something less volatile like bonds.

You're right, you can't predict the future, and this book is aimed squarely at those who try to by picking the hottest stock (think Yahoo!) or trend (think .com, or Real Estate in Japan).

www.MarkTAW.com
Tuesday, January 20, 2004

> put money in an IRA or 401(k) etc that have millions after 30 years.  I also know people who invested and lost it all.

And how is this different from heading over to the race track?

I guess the difference is that, when investing in 'the market' (as opposed to when betting at the race track), you're betting on: a) the total winnings being greater than the amount invested (because wealth is being created over time); and b) your investments being no worse than anyone else's (i.e. that it isn't the case that only a few well-invested people will make most of the profit).

Is it fair to say that investing in an index of high-quality bonds (not stocks) is a good idea for people who want better than no return and want virtually certainty that they won't lose their investment?

Christopher Wells
Tuesday, January 20, 2004

> http://finance.yahoo.com/q/bc?s=^DJI&t=my

Does that prove anything?

For example, if 5M is invested at the beginning, and no more investments are made, and then after 5 years the market is worth 10M, then it's a 100% profit.

On the other hand, if 5M is invested every year for 5 years (total investment is 25M) and after 5 years the market is worth 10M, then it's a 60% loss.

The fact that the total value increased between between 1985 and 2000 could just been that there were more people spending money on stocks, not that the average individual was making a profit?

It also seems that the net market value has been flat for 45 of the 70 years displayed (from 1930 to 1955, and again from 1965 to 1983, and again from 1999 to the present).

Christopher Wells
Tuesday, January 20, 2004

If you're 'betting' on the 'market' what you're betting on is that in 20 years time America's businesses will be in a better place than they are today.

Bonds tend to be less volatile than stocks, but if a company or government goes belly up, you could lose everything, unless you had a broad enough base to cover yourself. Still, if California fell into the sea, and you bought bonds in California based municipalities, California State itself, and California based businesses, that section of your bond portfolio goes bye bye.

If Tapiwa wants to pull out the sawed off shotgun and baseball bat and chase investors off his farm with his pickup truck, he's more than welcome to. ;-) Though there's no gaurantee that a fire won't wipe out the money in his mattresss or that inflation won't completely devalue it over the next 20 years.

www.MarkTAW.com
Tuesday, January 20, 2004

I think I should write a book, and call it Driving by Looking into the Rear View Mirror.

IanRae is right. I think the best bit in the book is its study of the more recent bubbles. There are other books that cover the history of crashes since recorded history began.

Portabella: I think my choice of words was silly :) Blame it on being a second language English speaker. I still think it is just as irrational to blindly put your money in index funds as it is to follow the next Gee Whizz investment strategy.

You hit the nail on the head. The one good thing about index funds is the low transaction fees. If you are going to invest in the stock exchange, and in the absence of any further information, you might as well go with the cheapest option. Buy and Hold. Now because you are not an accurate shot, you go for the shotgun approach and invest in several companies.... an Index.

Relying on the data we have is where the equation begins to break down. Quantitative Financial theory is based largely on looking at historical data, and then extrapolating into future. More of the same! If you are a believer in this then by all means go ahead.

Just for the record though, the chaps that got a Nobel prize in Economics for developing the model (or variations thereof) that used to value most financial assets, went on to lead one of the biggest corporate failures of all time.
(Google Black, Scholes and Long Term Capital Management)

"It's rational to want to invest in long-term, equity-based investments, because the data we have suggests that you will ultimately have more money if you do so."

The data we have ....mmm. And the data we don't? Torture your data sufficiently, and it will confess to anything. You just become very good at predicting the past.

Every time I hear the phrase long-run used to suggest that stocks will always go up, I cringe. Ask anyone who has invested in the Nikkei. It still is where it was 20 years ago. Would have been easier to keep the money under the pillow.

Oh yeah, it will never happen in this country... the Japanese economy is fucked up!!

Right. High corporate debt. Very low interest rates! Very high personal debt! Property at stupid prices, and everyone mortgaged to the hilt. Throw in huge govt borrowing and that huge current account deficit that the US is running.... Let's see where this takes us!

I am not in any way suggesting that people should not invest their money. They should do as they please with it, including investing in the stock exchange.

What I am saying though, and is touched upon in the book is that any successful investment strategy by definition has to be a secret.

If you have everyone on the bandwagon, you drive up the asset prices for no other reason than the fact that everyone is chasing said assets. Even indices will suffer the same fate, and real returns on your investment fall.

Another problem I have with index funds is that they are self defeating. If everyone and their dog bought index funds and nothing else, the financial system as we know it would not really function. Despite all the fancy stuff they talk about in finance textbooks about asset valuations, all a stock is worth at the end of the day is what the next guy is willing to pay. To actually find out what this is, you have to have trades taking place in sufficient volumes (liquidity). If everyone just held index funds, you would lose this liquidity, and possibly end up with more volatility in the market. Both are a bad thing for most investors.

Do I invest my money? Sure. Am I happy with my strategies? Very much so. Will I share said strategies? No.

Tapiwa
Tuesday, January 20, 2004

> If everyone and their dog bought index funds and nothing else, the financial system as we know it would not really function.

But they won't, so I can't take this objection very seriously.

> Do I invest my money? Sure. Am I happy with my strategies? Very much so. Will I share said strategies? No.

That's just the marketing you need to write a book on finance!

Now where is christopher baus? He always chimes in on threads like this.

Portabella
Tuesday, January 20, 2004

> Will I share said strategies? No.

For a limited time only, send 3 easy payments of $99.95 for Tapiwa's Secret Investment Strategies of the Very Arrogant. This offer is only good for the next 10 minutes after you read this thread (no matter when you read it), so send call now, operators are standing 'buy'.

www.MarkTAW.com
Tuesday, January 20, 2004

MarkTAW, rotfl :-)

There is only one successful strategy. Buy cheap and sell dear. Selling first and then buying later works too.

The problem is that were a finite number of securities exist, the more the buying the more expensive it gets. BAD

Similarly, the more the selling there is , the lower the price. BAD

Ergo, you want to minimise the number of people doing what you are doing at the same time you are doing it.

That, by definition is why any successful trading/investment strategy has to be secret. Anyone that says otherwise is selling snakeoil.

Now, where is that shotgun and baseball bat? Going Mark Hunting :-)

Tapiwa
Tuesday, January 20, 2004

Oh no, you might knock out my one remaining tooth with shotgun of yours. I'd better get my car off of cinder blocks so I can beat a hasty retreat.

I'm not here to sell any investment strategy to anyone, just describe the contents of the book. :)

www.MarkTAW.com
Tuesday, January 20, 2004

As for investing in the market: So far so good. I've been investing for a bit over 13 years. Even with the bubble-burst we experienced a few years ago, I've now got over 5K for every 1K that would be hiding in my mattress. I've got no problems with it. Yes, it's "driving by looking in the rearview mirror" -- but so far it's working. When it stops working, I'll stop doing it.

I do most of my investing outside the traditional "markets", but still keep about 15% of my net worth actively trading, and another 10% or so riding the index wave. Sometimes it's up, sometimes it's down, but a total of over 400% in roughly a decade ain't too bad. NOTE: That's *not* 400% a year(I wish <grin>), but a total gain of 400% over the entire 13 years. I'm too damned lazy at the moment to figure that as an annual compounded interest rate.

As long as it works, I'll stick with it. When it stops working, I'll put my money elsewhere. The real trick though, will be to see it coming long enough in advance that I don't turn 400% into *minus* 400%. I'm generally against "market timing" per se, but if I see a loss of > 10% in a short time period, I pull out and regroup.

No, it's not a sure thing. Yes, it's far better than taking your money down to the casino or local track (be it horses, or dogs, or whatever).

Sgt. Sausage
Tuesday, January 20, 2004

It's also easy to forget that the stock market is not just stock prices. There's more to the market than that, particularly from the point of index funds: dividends are still important. Concentrating on the "buying low, selling high" is typically an active investment approach.

Shodan
Wednesday, January 21, 2004

Shodan,

I agree with you. The problem is that tax laws in most countries are skewed against dividends (taxed twice ... well sort of) that most companies are reluctant to declare sizeable dividends.

Throw in Wall Street's absession with growth, and you end up where we are now. Companies will hang on to their cash to finance growth, or indeed pay down debt.

Many years ago, you put your money in a company and earned dividends. Now, the dividend-not-declared is (should be) reflected in the increasing share price.

Throw in the fact that there are twenty thirteen different valuation methods, and you can see how it gets messy pretty quickly.

Tapiwa
Wednesday, January 21, 2004

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