4 Lessons from A Random Walk Down Wall Street | Burton G. Malkiel

The Simple Secret to Intelligent Investing

Jack Yang
6 min readNov 3, 2020
A Random Walk Down Wall Street: The Time-Tested Strategy for Successful Investing


What is the best way to invest? This has been a question up for debate over decades. As new digital investing tools like Robinhood begin to popularize and waves of uncertainty emerge due to the pandemic, the stock market has been more volatile than ever, and the question of the best way to invest is tricker than ever. I am an amateur investor myself and also have friends who either made or lost money during the turbulent times. I decided to pick up this well-known investment book, which was first written almost 40 years ago, hoping to gain some insights on how to manage my portfolio. To be completely honest, even though I am reading a newer edition of the book, I thought the content would be outdated since the economical landscapes have shifted so much in the past few decades. I was pleasantly surprised to find the lessons from the book are still very relevant and can be easily utilized by anyone who is financially self-aware. I will share some of my most important takeaways in the following section.

Score: 4.75/5

Recommendation: anyone who would like to be financially intelligent


1. Beating the market is extremely difficult, if not impossible

If you only take one lesson from this book. This is it. Even though there are often portfolio managers or individuals who have made millions of dollars in the stock market, or have a very generous return on their investment, barely anyone can do so consistently, and for a long period of time. Some may argue Warren Buffett would be a counter-argument to such statements, however, as legendary of an investor as Buffett is, the recent returns on his investment are close to, or slightly below the market index and he starts to advocate for index funds, which we will explain in the next lesson.

Speaking of predicting the market and beating it, there are two major schools of thought: technical analysis, which predicts the stock by speculating others' behavior, and fundamental analysis, which predicts the stock by its intrinsic value. However, both approaches have their own flaws. For example, technical analysis is often troubled by people overreacting and underreacting to news, and fundamental analysis is often troubled by random events and dubious accounting. Even though people from either school can predict the market a few times in a roll, but none can do so consistently.

You can think of the betting on the market as a competition of coin tossing and head wins. Let’s say there are 200 people in the competition. About 100 survive after the first round, 50 in the second round, 25 in the third round, etc. After about 6 to 7 rounds, about only 2–3 people survive. This rate is astonishingly similar to that of the investors. Would you say those who win the coin toss competition is particularly skilled? Probably not, you would just say they are lucky. On the other hand, there are people who can beat the market 6 to 7 years in a role, but hardly anyone can do it for decades and decades in a role.

2. Index Funds. Index Funds. Index Funds!

Now that we know we probably will not be able to beat the market, then what we should do? The answer is simple: we buy the market. Here is the magic of index funds. Index funds a large selection of funds that are selected according to their ratio in the index. There are some well-known indexes such as Nasdaq, S&P 500, and Dow. Those indexes are deliberately calculated to represent the market as a whole so that, when you buy a share of the index fund, you are buying a small share of the entire market. A well-proven rule in the investing world is that diversity could balance your portfolio and buying an index is a great way to diversify your investment. There are some more tips to apply to further diversify your portfolio in the upcoming lessons.

One disadvantage of stock investing, especially for day traders, is the fee for each transaction. Index funds also beautifully make up this shortcoming by implementing the buy-and-hold strategy, which only needs you to pay the transaction fee once. Another disadvantage of stock investing is a high fee for portfolio managers, who usually produce sub-optimal results, as we discuss earlier. When you invest in an index fund, you simply need to choose a low-expense fund and put your money in there (one of my favorite index funds is the Vanguard Total Stock Market Index, VTSAX, has an expense ratio of only 0.04%, which is $4 for every $10,000 you invested).

3. Tips on Managing Your Portfolio

  • Balance base on risk: Generally speaking, risks are correlated to return. Usually, stocks are riskier than bonds but also yield greater returns. Depend on your tolerance of risk and which stage you are in life, you can balance between the two to produce a mix that is best for you. As a rule of thumb, if you are young, you should invest more in stocks, and as you age, more and more of your portfolio should consist of bonds.
  • Diversify your portfolio: As we talked about how diversification could balance out some of the risks you are taking. To elaborate on this subject, diversification works best with uncorrelated markets, meaning the rise or fall of one market does not directly affect the other. Therefore, it is highly recommended to invest in both domestic stocks as well as international stocks. The author also suggests real estate is also a good section to invest in. Personally, I strongly recommend investing in the foreign stock markets such as Africa and Asia since they have the most room for growth.
  • Invest base on stock performance: a more academic term for this strategy is “dollar-cost average.” To speak in a more understandable way, when stocks fall, the price of each share is usually very cheap, therefore with the same amount of cash you can buy more shares. When stocks rise, the price per share is more expensive and therefore you can buy fewer shares with the same money. In another word, instead of invest the same amount every time, invest more when stocks fall and invest less when stocks rise.
  • The key to beating the market is not timing but time: As we discussed previously, it is almost impossible to beat the market by timing the market. The safest and most efficient way to do it is through time. The stocks always go up in the long run because the values of businesses are rising and people are getting more effective in creating value. Combined with the compounding effect, an index fund holds for a long period of time can produce very generous results.

4. If you still want to invest in the stock market, THIS is for you

By the end of the book, Malkiel finally gave some advice on how to invest in the stock market, which was exactly what I was looking for when I first picked up this book.

  • Buy companies that can sustain above-average earnings growth for at least five years: As Warren Buffet often reminds people, when you buy a share of stock, you are buying a share of the company, and earnings growth is usually a pretty indicator. You should invest in a company that has growth potential above-average that can be backed by its track record. Investing in a recently IPO company can give you a great result, but at the same time, you are assuming tremendous risk.
  • Never pay more than what fundamental analysis value: Fundamental analysis tells you the value of the company, even though the share price can fluctuate from time to time, it usually should stay around what it is truly worth.
  • It helps to buy stocks of anticipated growth: This is risky because you are buying others’ expectations. Things very often don’t work out because people could overreact or underreact to the news, but this is essentially what technical analyst is trying to do.
  • Trade little: This is pretty self-evident because the more you trade, the more transaction fee you have to pay, and therefore the lower your return will be.