The Time-Tested Strategy for. Successful Investing BURTON G. MALKIEL. W. W. NORTON & COMPANY New York London

Transcription

1 A RANDOM WALK DOWN WALL STREET The Time-Tested Strategy for Successful Investing BURTON G. MALKIEL W. W. NORTON & COMPANY New York London

2 CONTENTS Preface 17 Acknowledgments from Earlier Editions 21 Part One STOCKS AND THEIR VALUE 1. FIRM FOUNDATIONS AND CASTLES IN THE AIR Whatlsa Random Walk? 26 Investing as a Way of Life Today 28 InvestinginTheory 30 The Firm-Foundation Theory 31 The Castle-in-the-Air Theory 33 Howthe Random Walk Is to Be Conducted THE MADNESS OF CROWDS 37 The Tulip-Bulb Craze 38 The South Sea Bubble 41

3 8 CONTENTS Wall Street Lays an Egg 48 An Afterword ss 3. SPECULATIVE BUBBLES FROM THE SIXTIES INTO THE NINETIES 56 The Sanity of Institutions 56 The Soaring Sixties 57 The New "New Era": The Growth-Stock/New-Issue Craze 57 Synergy Generates Energy: The Conglomerate Boom 60 Performance Comes to the Market: The Bubble in Concept Stocks 65 The Nifty Fifty 68 The Roaring Eighties 70 The Return ofnew Issues 70 Concepts Conquer Again: The Biotechnology Bubble 71 ZZZZBest Bubble ofall 73 What Does It All Mean? 75 The Japanese Yen for Land and Stocks THE EXPLOSIVE BUBBLES OF THE EARLY 2000s 79 The Internet Bubble 79 A Broad-Scale High-Tech Bubble 81 YetAnother New-Issue Craze 84 TheGlobe.com 86 Security Analysts $peak Up 88 New Valuation Metrics 89 The Writes ofthe Media 91 Fraud Slithers In and Strangles the Market 93 Should We Have Known the Dangers? 96 The U.S. Housing Bubble and Crash ofthe Early 2000s 97 The New System of Banking 98 Looser Lending Standards 100 The Housing Bubble 101 Bubbles and Economic Activity 104 Does This Mean That Markets Are Inefficient? 104

4 CONTENTS 9 Part Two HOW THE PROS PLAY THE BIGGEST GAME IN TOWN 5. TECHNICAL AND FUNDAMENTAL ANALYSIS 109 Technical versus Fundamental Analysis 110 What Can Charts Teil You? in The Rationale for the Charting Method Iis Why Might Charting Fail to Work? 116 From Chartist to Technician 117 The Technique of Fundamental Analysis 118 Three Important Caveats 126 Why Might Fundamental Analysis Fail to Work? 128 Using Fundamental and Technical Analysis Together TECHNICAL ANALYSIS AND THE RANDOM-WALK THEORY 134 Holes in Their Shoes and Ambiguity in Their Forecasts 134 Is There Momentum in the Stock Market? 136 Just What Exactly Is a Random Walk? 137 Some More Elaborate Technical Systems 141 The Filter System 141 The Dow Theory 142 The Relative-Strength System 143 Price-Volume Systems 143 Reading Chart Patterns 144 Randomness Is Hard to Accept 145 A Gaggle of Other Technical Theories to Help You Lose Money 146 The Hemline Indicator 146 The Super Bowl Indicator 148 The Odd-Lot Theory 149 Dogs ofthe Dow 149 January Effect iso AFew More Systems Technical Market Gurus isi isi Why Are Technicians Still Hired? 154

5 10 CONTENTS AppraisingtheCounterattack 154 Implications for Investors HOW GOOD IS FUNDAMENTAL ANALYSIS? THE EFFICIENT- MARKET HYPOTHESIS 159 The Views from Wall Street and Aeademia ieo Are Security Analysts Fundamentally Clairvoyant? Why the Crystal Ball Is Clouded The Influence ofrandom Events The Produktion ofdubious Reported Earnings through "Creative" ieo Accounting Procedures Errors Made by the Analysts Themselves The Loss ofthe Best Analysts to the Sales Desk, to Portfolio Management, or to Hedge Funds The Conflicts oflnterest between Research and Investment Banking Departments 170 Do Security Analysts Pick Winners? The Performance of the Mutual Funds 174 The Semi- Strong and Strong Forms of the Efficient-Market Hypothesis (EMH) 182 A Note on High-Frequency Trading (HFT) 184 Part Three THE NEW INVESTMENT TECHNOLOGY 8. A NEW WALKING SHOE: MODERN PORTFOLIO THEORY 189 The Role of Risk 190 Defining Risk: The Dispersion of Returns 191 Illustration: Expected Return and Variance Measures of Reward and Risk 191 Documenting Risk: A Long-Run Study 194 Reducing Risk: Modern Portfolio Theory (MPT) 196 Diversification in Practice 201

6 CONTENTS REAPING REWARD BY INCREASING RISK 209 Beta and Systematic Risk 210 The Capital-Asset Pricing Model (CAPM) 213 Let's Look at the Record 219 AnAppraisaloftheEvidence 221 The Quant Quest for Better Measures of Risk: Arbitrage Pricing Theory 223 The Fama-French Three-Factor Model 225 ASummingUp BEHAVIORAL FINANCE 229 The Irrational Behavior of Individual Investors 232 Overconfidence 232 Biased Judgments 235 Herding 239 Loss Aversion 243 Pride and Regret 245 Behavioral Finance and Savings 246 The Limits to Arbitrage 248 What Are the Lessons for Investors from Behavioral Finance? Avoid Herd Behavior Avoid Overtrading If You Do Trade: Seil Losers, Not Winners Other Stupid Investor Tricks 257 Does Behavioral Finance Teach Ways to Beat the Market? IS "SMART BETA" REALLY SMART? 260 What Is "Smart Beta"? 260 Four Tasty Flavors: Their Pros and Cons Value Wins Smaller Is Better Momentum and Reversion to the Mean Low Volatility CanProduce High Returns 268 Blended Flavors and Strategies 270

7 CONTENTS "Smart Beta" Funds Flunk the Risk Test 271 Appraisal of "Smart Beta" 271 How Well Have Factor Tilts Worked in Practice? 274 Value and Size Tilts 274 Blended Hybrid Strategies 277 Research Afflliates Fundamental Index (RAFI) 278 Equally Weighted Portfolio Strategies 280 Other Factor Tilts 281 Low-Beta (Low-Volatility) Strategies 281 Momentum Strategies 281 Implications for Investors 282 Implications for Believers in Efficient Markets 284 Capitalization-Weighted Indexing Remains at the Top ofthe Class 287 Part Four A PRACTICA! GUIDE FOR RANDOM WALKERS AND OTHERINVESTORS A FITNESS MANUAL FOR RANDOM WALKERS AND OTHER INVESTORS 291 Exercise 1: Gather the Necessary Supplies 292 Exercise 2: Don't Be Caught Empty-Handed: Cover Yourself with Cash Reserves and Insurance 294 Cash Reserves 294 Insurance 295 Deferred Variable Annuities 297 Exercise 3: Be Competitive Let the Yield on Your Cash Reserve Keep Pace with Inflation 297 Money-Market Mutual Funds (Money Funds) 298 Bank Certificates of Deposit (CDs) 298 Internet Banks 299 Treasury Bills 299

8 CONTENTS 13 Tax-Exempt Money-Market Funds 300 Exercise 4: Learn How to Dodge the Tax Collector 300 Individual Retirement Accounts 301 RothlRAs 303 Pension Plans 303 Savingfor College: As Easy as Exercise 5: Make Sure the Shoe Fits: Understand Your Investment Objectives 306 Exercise 6: Begin Your Walk at Your Own Home Renting Leads to Flabby Investment Muscles 313 Exercise 7: How to Investigate a Promenade through Bond Country 315 Zero-Coupon Bonds Can Be Useful to Fund Future Liabilities 316 No-Load Bond Funds Can Be Appropriate Vehicles for Individual Investors 317 Tax-Exempt Bonds Are Useful for High-Bracket Investors 317 Hot TIPS: Inflation-Indexed Bonds 319 Should You Be a Bond-Market Junkie? 320 Foreign Bonds 321 Exercise 7A: Use Bond Substitutes for Part of the Aggregate Bond Portfolio during Eras of Financial Repression 321 Exercise 8: Tiptoe through the Fields of Gold, Collectibles, and Other Investments 322 Exercise 9: Remember That Investment Costs Are Not Random; Some Are Lower Than Others 325 Exercise 10: Avoid Sinkholes and Stumbling Blocks: Diversify Your Investment Steps 326 A Final Checkup 327 HANDICAPPING THE FINANCIAL RAGE: A PRIMER IN UNDERSTANDING AND PROJECTING RETURNS FROM STOCKS AND BONDS 329 What Determines the Returns from Stocks and Bonds? 329 Four Historical Eras of Financial Market Returns 334

9 CONTENTS Era I: The Age of Comfort 335 Era II: The Age of Angst 337 Era III: The Age of Exuberance 341 Era IV: The Age of Disenchantment 343 The Markets from 2009 through Handicapping Future Returns ALIFE-CYCLE GUIDE TO INVESTING 349 Five Asset-Allocation Principles Risk and Reward Are Related YourActual Risk in Stock and Bond Investing Depends on the Length of Time You Hold Your Investment Dollar-Cost Averaging Can Reduce the Risks of Investing in Stocks and Bonds Rebalancing Can Reduce Investment Risk and Possibly Increase Returns Distinguishing between Your Attitüde toward and Your Capacity for Risk 361 Three Guidelines to Tailoring a Life-Cycle Investment Plan Specific Needs Require Dedicated Specific Assets Recognize Your Tolerance for Risk Persistent Saving in Regulär Amounts, No Matter How Small, Pays Off 364 The Life- Cycle Investment Guide 366 Life-Cycle Funds 370 Investment Management Once You Have Retired 370 Inadequate Preparationfor Retirement 371 Investing a Retirement Nest Egg 372 Annuities 372 The Do-It-Yourself Method THREE GIANT STEPS DOWN WALL STREET 379 The No-Brainer Step: Investing in Index Funds 380 The Index-Fund Solution: A Summary 382

10 CONTENTS IS A Broader Definition oflndexing 385 A Specific Index-Fund Portfolio 388 ETFs and Taxes 390 The Do-It-Yourself Step: Potentially Useful Stock-Picking Rules 393 Rule 1: Confine stock purchases to companies that appear able to sustain above-average earnings growthfor at leastfive years 394 Rule 2: Neverpay more for a stock than can reasonably bejustified by a firmfoundation ofvalue 394 Rule 3: It helps to buy stocks with the kinds ofstories ofanticipated growth on which investors can build Castles in the air 395 Rule 4: Trade as little as possible 395 The Substitute-Player Step: Hiring a Professional Wall Street Walker 398 The Morningstar Mutual-Fund Information Service 400 The Malkiel Step 401 A Paradox 405 Investment Advisers 407 Some Last Reflections on Our Walk 408 A Final Word 410 A Random Walker's Address Book and Reference Guide to Mutual Funds and ETFs 413 Index 423