A Random Walk Down Wall Street, 12th Edition

theory and practice. Chapter 10 describes the exciting new field of behavioral finance and underscores the important lessons investors should learn from the insights of the behavioralists. Chapter 11 asks whether smart beta investment strategies are really smart and whether risk parity strategies are too risky. A new section has been added to present practical investment strategies for investors who have retired. So much new material has been added that readers who may have read an earlier edition of this book in college or business school will find this new edition rewarding reading. This edition takes a hard look at the basic thesis of earlier editions of Random Walk, that the market prices stocks so efficiently that a blindfolded chimpanzee throwing darts at the stock listings can select a portfolio that performs as well as those managed by the experts. Through the past 45 years, that thesis has held up remarkably well. More than two-thirds of professional portfolio managers have been outperformed by unmanaged, broad-based index funds. Nevertheless, there are still both academics and practitioners who doubt the validity of the theory. And the stock market crash of October 1987, the Internet bubble, and the financial crisis of 2008-2009 raised further questions concerning the vaunted efficiency of the market. This edition explains the recent controversy and reexamines the claim that it's possible to beat the market. I conclude that reports of the death of the efficient market hypothesis are vastly exaggerated. I will, however, review the evidence on a number of techniques of stock selection that are believed to tilt the odds of success in favor of the individual investor. The book remains, fundamentally, a readable investment guide for individual investors. As I have counseled individuals and families about financial strategy, it has become increasingly clear to me that one's capacity for risk-bearing depends importantly upon one's age and ability to earn income from non-investment sources. It is also the case that the risk involved in many investments decreases with the length of time the investment can be held. For these reasons, optimal investment strategies must be age-related. Chapter 14, entitled A Life-Cycle Guide to Investing, should prove very helpful to people of all ages. This chapter alone is worth the cost of a high-priced appointment with a personal financial advisor. Burton G. Malkiel, Princeton University, June 2018. Part 1, Stocks and Their Value Chapter 1, Firm Foundations and Castles in the Air From Oscar Wilde, Lady Windermere's fan, What is a cynic? A man who knows the price of everything and the value of nothing. In this book I will take you on a random walk down Wall Street, providing a guided tour of a complex world of finance and practical advice on investment opportunities and strategies. Many people say that the individual investor has scarcely a chance today against Wall Street's professionals. They point to professional investment strategies using complex derivative instruments and high-frequency trading. They read news reports of accounting fraud, mammoth takeovers, and the activities of well-financed hedge funds. This complexity suggests that there is no longer any room for the individual investor in today's markets. Nothing could be further from the truth. You can do as well as the experts, perhaps even better. It was the steady investors who kept their heads when the stock market tanked in March 2009 and then saw the value of their holdings eventually recover and continue to produce attractive returns. And many of the pros lost their shirts in 2008 buying derivative securities they failed to understand, as well as during the early 2000s when they overloaded their portfolios with overpriced tech stocks. This book is a succinct guide for the individual investor. It covers everything from insurance to income taxes. It tells you how to buy life insurance and how to avoid getting ripped off by banks and brokers. It will even tell you what to do about gold and diamonds. But primarily, it is a book about common stocks, an investment medium that not only provided generous long-run returns in the past, but also appears to represent good possibilities for the years ahead. The Lifecycle Investment Guide described in Part 4 gives individuals of all age groups specific portfolio recommendations for meeting their financial goals, including advice on how to invest in retirement.