“A Random Walk Down Wall Street” is a long-lasting US stock market investment book with rich content. It is not an exaggeration to call it a must-read book for all US stock investors.
Reasons for recommending book “A Random Walk Down Wall Street”
- It is suitable for readers who are looking for a book that covers a wide range, spans a very long time, and has in-depth content. After reading this book, you can understand the ins and outs of the US stock market.
- This book has been best-selling for nearly fifty years, which shows that this book has withstood the test of the times, can withstand the inspection of time, and has a broad readership.
- The content of this book is in-depth, rich in content, and persuasive.
- Many famous examples will be interspersed at appropriate times to deepen the reader’s impression and help the reader understand what the author wants to express.
- Because the author comes from an academic school, he also uses words that ordinary people can understand in the book to explain some financial theories and terms closely related to stock investment. Including behavioral science, efficient market theory, random walk theory, beta coefficient, modern portfolio theory, asset pricing model, etc.
Author’s background
Merkiel is a professor at the prestigious Ivy League school Princeton University in the United States, the chief investment officer of the investment consulting company Wealthfront, a former member of the U.S. President’s Economic Advisory Council, and a director of several large companies.
This is also the reason why his book covers a wide range of topics and is meaningful, rather than just words on paper.
Crazy crowd
Gustav. Gustave Le Bon once mentioned in his psychological masterpiece “The Crowd” a hundred years ago that “as soon as people join a group, their IQ is seriously reduced. In order to gain recognition, individuals are willing to abandon right and wrong. Use IQ to exchange for that sense of belonging that makes people feel safe.”
“When the crowd gathers together, what is accumulated is stupidity, not wisdom. Compared with when one person is alone, the collective IQ of the crowd will be significantly higher. ” “The public has no ability to discern, so they cannot judge the authenticity of things. Many opinions that cannot withstand scrutiny can easily be universally agreed upon!”
History of stock market speculative bubbles
The 1960s with all-round growth, the 1970s with crazy valuations of the Nifty Fifty, the biotech bubble in the 1980s, the 1990s with corporate monopoly on the market, and the dot-com bubble in the early 2000s – the stock market is the most indispensable historical lesson. It’s a bubble. But human nature is forgetful and it is impossible to learn lessons, which is why bubbles will definitely reappear.
Stock Valuation
In short, estimating the intrinsic value of the stocks you buy is the first lesson for investors. By far, the discounted cash flow method (DCF) is the more well-known and accepted method. For details, please see my post of “DCF (Discounted Cash Flow) Calculator” and “What’s TSMC DCF intrinsic value?How to calculate it quickly with a free tool?“
The author believes that the factors that affect stock prices include the following:
- Expected growth rate: Please see the discussion of my post “U.S. stocks and Taiwan stocks are valued in completely different ways”
- Expected dividend distribution: Please see the discussion of my posts of “Dividend-rich industries and 6 big differences from Taiwan” , “Why dividends disappeared suddenly these years?“, “Considerations as a dividends investor“
- Risk level: Please see the discussion of my posts “SEC asked: important risks disclosed in financial report” and “What are the risks investors should face up to?“
- Market interest rate levels: Please see the discussion in my post “Tax, inflation and rate are the top three serious killers to investors“
I happened to have written an article on this topic before. Readers can refer to the explanation of my previous post of “Reasons drive stock price up“.
Three principles of sound investment
Based on his many years of experience, the author puts forward the following three principles for sound investment in the book:
- Only buy companies with above-average earnings growth over the next five or more years.
- Never pay more than the true intrinsic price to buy stocks that are overpriced.
- Look for growth stocks with growth themes.
Note: I personally highly agree with these three principles mentioned by the author.
Are Expert and technical analysis useful?
What can graphs tell you? Technical analysis also fails. Consistent with Charlie Munger’s statement, the author stated that in his life, he had never seen anyone become rich by using technical analysis to study stocks.
Believers of the random walk theory, usually academics, believe that stock prices are unpredictable and it is impossible for anyone to deliver good investment returns. No matter how hard investors try, it will be in vain. The result is like a monkey shooting darts at the wall, because the market has fully reflected the price.
Wall Streeters certainly disagree with the academics. The author himself stated in the book that his views are not as negative as those of academics who deny Wall Street.
However, the author emphasizes in the book: He still believes that the efficient market hypothesis can help avoid risks and is still beneficial to investors. For this part, please see my previous post of “Why is the efficient market hypothesis unreasonable?“
Buffett has mentioned many times that when he was in college before he found his own investment style, he would hold a bunch of line charts every day and study stock market trends, but he concluded that “little effect was achieved.”
Technical analysis focuses on the performance of past stock prices and infers the graphical trend of future stock prices; it basically does not care about the actual operating details of the company. What about fundamental analysis? Fundamental analysis goes in the opposite direction, focusing almost entirely on studying the company’s current operating and financial indicators, finding out the company’s positive value, and deducing how much it can increase or decrease the future stock price.
However, the author believes that basic analysis may fail due to the following three reasons:
- Information and analysis may be incorrect
- The estimate of value may be inappropriate
- The market may never reflect the true value of the company, which was my main argument in the article “Problems with Cigar Butt Investment“
Remember to diversify your investments
Use modern portfolio theory to reduce risk. For this part, see my post “Why is portfolio rebalancing unreasonable“
Most investors should diversify investment risks. A better approach is to invest in large-cap ETFs, because most investors do not have time to study the market and the companies they invest in. Through this, they can also participate in stock market investments and achieve long-term benefits. Your wealth increases and you can spread risks. For this part, please see my previous post of “Most investors should invest ETFs tracking broader market“
Because of the survivorship bias, the author advises investors not to trust fund operators’ compensation figures, because the operators will not tell you that funds with poor performance are no longer included in statistics or do not exist. What you see remains, those funds that are lucky enough to survive only.
The author’s years of experience point out that buying mutual funds does not bring benefits to investors because the returns of stock mutual funds are not better than the returns of the market index. For this part, you can see my previous post of “Any strong reason to buy mutual fund?“
Personal Financial Investment Planning
One of the main reasons why investors are prone to investment failure is that they do not pay attention to it and do not know how to measure the return on investment. For this part, please see my previous post of “Investors should care annualized rate of return (IRR), How to calculate?“, “What information should investors document?“, and “A investor can be sustained or not? how to verify?“
Investors believe too much in their own abilities and are misled by the media into believing that they can beat the market. As Charles Ellis wrote in an article called “The Loser’s Game” in the Financial Analysts Magazine: “The business of investment management is (This appears to be a profession, but it is not) It is based on a simple and basic belief that professional fund managers can beat the market. However, this premise seems wrong.”
“The biggest mistake investors make is to want to beat the market. Retail investors can never beat the market.” Charles. Ellis believes that the biggest mistake investors make is trying to beat the market. For this part, please see my post “Charles. An introduction to Charles Ellis and his book “Winning the Loser’s Game”.
Related articles
- ““A Random Walk Down Wall Street” is a must-read for US stock investors“
- “Great primer books for Investing in the stock market“
- ““One Up on Wall Street”, Peter Lynch’s great book for investing newbie“
- “Charles Ellis and his “Winning the Loser’s Game”
- ““Benjamin Graham on Value Investing”, Graham’s bio book“
- “A investor can be sustained or not? how to verify?“
- “DCF (Discounted Cash Flow) Calculator“
- “Why is TSMC valuation much lower than US peers?“
- “What’s TSMC DCF intrinsic value?How to calculate it quickly with a free tool?“
- “Investors should care annualized rate of return (IRR), How to calculate?
- “What information should investors document?“
- “Why is the efficient market hypothesis unreasonable?“
- “Why Modern Portfolio Theory Unreasonable?“
- “Most investors should invest ETFs tracking broader market“
- “Reasons drive stock price up“
- “Valuation methods significant different between US and Taiwan investors“
- “SEC asked: important risks disclosed in financial report“
- “What are the risks investors should face up to?“
- “Tax, inflation and rate are the top three serious killers to investors“
- “Dividend-rich industries and 6 big differences from Taiwan”
- “Why dividends disappeared suddenly these years?“
- “Considerations as a dividends investor“
- “Problems with Cigar Butt Investment“
- “Why is portfolio rebalancing unreasonable“
- “Any strong reason to buy mutual fund?“
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