A “random walk” – in market terms – suggests that a “blindfolded monkey” would have as much luck selecting a portfolio as a pro. But Burton Malkiel’s classic investment book is anything but random.
Since stock prices cannot be predicted in the short term, argues Malkiel, individual investors are better off buying and holding onto index funds than meddling with securities or actively managing mutual funds.
Not only will a broad range of index funds outperform a professionally managed portfolio in the long run, but investors can avoid expense charges and trading costs, which decrease returns.
Basically, this book is a defence of the Efficient Market Hypotheses, or at least part of it.
There are two parts to the EMH. One is that the price is always right. So that there’s no such thing as a bubble ever because all the valuations of the market price of securities are representative of their underlying value. The other part is that there’s no free lunch. Or basically arbitrage opportunities may exist, but they are not predictable, nor do they persist.
The second part is truer than the first, and that’s what this book really digs into, showing you that there are no persistent ways to beat the market.
If that’s true, then the best way to consistently make money is to just buy the market.
Thankfully there are financial instruments that make that possible.