A Random Talk with Burton Malkiel

A Random Walk Down Wall Street was first published in 1973.

It was the first real call to arms for the creation of an index fund that would track the return of the stock market minus a minimal fee. It’s hard to believe now that index funds didn’t exist back then.

In fact, so many of the financial tools we use today weren’t available in 1973. Here’s Malkiel in the latest edition of the book on how far we’ve come:

In 1973, we did not have money-market funds, ATMs, index mutual funds, ETFs, tax-exempt funds, emerging-market funds, target-date funds, floating-rate notes, volatility derivatives, inflation protection securities, equity REITs, asset-backed securities, “smart beta” strategies, Roth IRAs, 529 college savings plans, zero-coupon bonds, financial and commodity futures and options, and new trading techniques such as “portfolio insurance” and “high-frequency trading,” to mention just a few of the changes that have occurred in the financial environment.

It was so much harder being an investor back then because the barriers to entry were higher. Despite their popularity, you could argue many investors take index funds for granted these days.

Michael and I had a chance to speak with Malkiel this week for a short interview on Animal Spirits. I asked him what people get wrong about the general idea of efficient markets, which is the theory a random walk comes from in the first place. I loved his answer:

Some people say that efficient markets means that the price is always right. If that was the way the efficient market hypothesis was stated, it’s clearly wrong because we know perfectly well that the price is often wrong. In fact, I would say the price is always wrong. It’s just that we don’t know for sure whether it’s too high or too low. It’s not that crazy things don’t happen.

In short, markets are not perfect but they’re also not easy to beat.

I read this book early in my career and never thought in a million years I would speak to the author someday.

We also discussed:

  • Why there was so much pushback to A Random Walk Down Wall Street when it first came out
  • Why so many young investors assume indexing is garbage
  • Why the idea of randomness is so hard to accept
  • What does the concept of efficient markets actually mean?
  • Why the pricing of stocks is ALWAYS wrong
  • How does momentum square with the random walk?
  • Why is there momentum in the markets?
  • The benefits of a multi-factor approach
  • Malkiel’s relationship with Jack Bogle
  • Why index funds were initially a failure from a marketing perspective
  • What are investors supposed to do with such low bond yields?
  • Potential bond substitutes
  • Some of the best new investment tools for investors that didn’t exist in the past
  • The next revolution of investment management

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