Talking the Walk With Burton Malkiel

"The problem is that we attempt to solve the simplest questions cleverly, thereby rendering them unusually complex. One should seek the simple solution."
-- Anton Chekhov

Eventually, every investing strategy that gains a following has to come up against Burton Malkiel.

Malkiel is the author of the landmark A Random Walk Down Wall Street, which contains the most assured route to long-term investing success yet discovered. Ironically, or perhaps as a result, the Princeton University professor's treatise is probably the most-reviled, oft-challenged philosophy on Wall Street.

The message of his book, first published in 1973, is simple: Investors are better off buying and holding an index fund than attempting to buy and sell individual stocks and actively managed funds. The market, according to Malkiel, prices stocks so efficiently that strategies designed to beat it are useless. As he puts it -- and this is where the Wall Street revulsion comes in -- "A blindfolded monkey throwing darts at a newspaper's financial pages could select a portfolio that would do just as well as one carefully selected by the experts."

His treatise helped spawn the index fund industry (he now sits on the board of directors of Vanguard). It also spawned a slew of critics, including a new generation in the wake of the Internet bubble. The 70-year-old professor aims to set the record straight with the eighth edition of Random Walk, which hits the shelves this month. Along with extensive updates, the new edition features a new chapter on the Internet bubble that fits seamlessly into Malkiel's chronicle of market manias over the past four centuries. It also includes a strident defense of efficient markets and index fund investing.

Professor Malkiel spoke in his campus office about the new edition.

What are the reasons for updating A Random Walk Down Wall Street?

Professor Malkiel: While the basic investing message of the book hasn't changed since its original edition in 1973, there have been several important developments over the past few years that make new editions necessary.

First and foremost, the book remains an investment guide for individuals. The advice I have given since the first edition is that investors are better off buying and holding index funds in a diversified portfolio than trying to beat the market by purchasing individual stocks or actively managed mutual funds. I wanted to examine if the latest data validated the advice from earlier editions, and examine some of the recent challenges to the efficient-market theory. The latest evidence confirms that index fund investing works exceedingly well.

Also, I wanted to address the astonishing number of financial innovations that have arisen in recent years that change how individuals invest in the market. When I recommended buying the S&P 500 index in the first edition, I noted that this was a theoretical suggestion because there were no index funds at the time. I also asked, isn't it time that investors have the ability to buy the index?

In the intervening years, of course, we have seen the creation of a wide range of index funds. There are many other new products to consider as well: Money funds, municipal bond funds, real estate investment trust funds. We didn't have Roth IRAs or Section 529 college savings plans before. This edition of the book discusses these new products and explains how individual investors should use them.

What about the events that have transpired in the markets themselves?

Professor Malkiel: That is the third reason for updating the book. The past few years have witnessed the Internet bubble and its collapse. In previous editions, I discussed the speculative bubbles through market history -- the Dutch tulip-bulb mania of the 17th century, the South Sea bubble in the 18th century and, more recently, the Nifty Fifty in the 1970s and the Japanese market of the 1980s.

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