A Random Walk Down Wall Street by Malkiel (Book Review)

Details of the Book

A Random Walk Down Wall Street is a book written by Burton G. Malkiel. Burton is an Economics Professor at the University of Princeton. Malkiel is also the chairman of the Chemical Bank. The target market for the book is the people, who have entrepreneurial mind. Thus, A Random Walk Down Wall Street by Malkiel aims to sharpen the thoughts about investment improve the business understanding and knowledge.

The title of the book is fascinating and catches the eye of a customer. Wall Street is known for its business prowess and aggressiveness in corporate ventures. Taking a random walk typically means waking up one day, freshening up, driving through to the Wall Street, parking the car, and taking a walk along the street of Wall Street just to witness and learn how business is run. Thus, the book aims to reveal the investments secrets and strategies on the Wall Street.

For a person with a business mind, the research on the changing trends in investments delivered in simple terms counts as a value. The book is important for a reader, who hopes to undertake the career of an investor at some point in life. Malkiel’s book presents the comprehensive research on the methods used by successful investors to choose where to channel their money. By reading A Random Walk Down Wall Street, one learns about taxation, fast paying investment methods, asset accumulation strategies, liabilities in a person’s life, and the ways to avoid having more liabilities than assets.

Setting of the Book

Malkiel in his book A Random Walk down Wall Street has mainly put emphasis on the Wall Street, its operations, strategies and fallacies. The professionals in the Wall Street have been known for great stock market trading skills around the world. Malkiel uses his book to look into how the professionals in the Wall Street calculate their options for investment and assess the opportunities. The author tries to draw a clear picture by analyzing the stock market. Moreover, he supports the analysis on the investments made in the street of Wall Street by using graphs for illustrations.

The Wall Street is a street in the City of New York which runs about eight blocks. The street has contributed to the view of the New York City as the most powerful city in the United States in financial world. Moreover, the New York City is considered as the principal center for finance in the world because of the number of transactions taking place in the Wall Street. The two stock exchanges that are viewed as the largest in the world are found in the City of New York. They are New York stock exchange and the NASDAQ.

Looking at the Wall Street through the lens of its symbolic meaning and concepts, it represents economic influence, political power, and superiority. The Wall Street is believed to have grown through capitalism, constant innovation, and trade. Many personalities, who have been investing in the Street of Wall Street, have acquired fame, influence, and money.

Characters in the Book

Our main character in the book A Random Walk down Wall Street is the writer himself, Burton G. Malkiel. The author tells the reader that at some point of his life he worked with a renowned investment firm in the Wall Street. During his investment career, Malkiel developed in-depth knowledge base as a market professional. Later, the author became an economist and specialized in markets operations with securities as well as behavior in investment. Due to the previous stock market experience, Malkiel became an investor and successfully participates in the market today.

Among the many characters in the book, the second influential persona is Luthor of the movie Superman. Malkiel uses the famous hero to illustrate the concept of speculation. In the movie Superman, Luthor was an evil man who purchased a piece of land in the city of Arizona based on speculation that the City of California, where he initially stayed, would be washed away by the ocean through a land slide. If Luthor considered trends in construction of houses and patterns that people followed when migrating before purchasing the land, then his acquisition would be the investment according to the author.

Notably, A Random Walk down Wall Street by Malkiel describes many personalities in the investment world, including John B. Williams, who developed the classical Firm Foundation Theory. William is said to have given an introduction of the concept of discounting. William presented a formula which is used to determine the value of any given stock. The economist mainly focused on income gained from stock dividends. Moreover, he argued it would be beneficial to perceive the money as a potential for of earnings in the future rather than the value of the money today. In the early days, money markets did not exist, which complicated the ability to make money on money. However, later, the banks were developed, which led to the introduction of personal bank accounts. Thus, some services of the bank tellers were replaced with the introduction of ATM machines.

Malkiel also brought up John Maynard Keynes, who was successful in investment and one of the most renowned economists. According to the writer, Keynes’ claimed that individuals with prowess in investment have a preference of channeling their energy towards the analysis of how other investors react to changes in stock prices’ trends rather than estimating the value of stocks. Keynes was a successful person in investment. His approach is to estimate the trends in the future and buy the most lucrative options before everyone else does.

In the book A Random Walk down Wall Street by Malkiel, Chekhov’s family also plays a role as an illustration. Chekhov’s family is an example of the way the free enterprise opposed to the Marxist system. Malkiel tells the readers how the Chekhov’s failed to work towards keeping their money. The author uses the story to emphasize the need to possess information and knowledge on investment and whom to trust when choosing the actually investment.

The Major Ideas in the Book

Malkiel tries to narrate the importance and relevance of investment in his book. Through the proof of empirical research, the writer describes how to invest, where to invest, and when to invest. Malkiel also presents the advice on the safest ways for investment and the points to consider before distributing the money. The author simplifies the complicated terms and ideas in finance by using graphs and examples that the majority of people can relate to.

In his book, Malkiel focuses on investment

He gives advice to the retirees and people, who are on their way to retirement, on how to plan their account. The book educates people on the necessary insurance covers for the investment and the tax applicable to their incomes. For people wanting to build or purchase a house, the author offers advice regarding mortgages. Malkiel also describes the way to avoid the loss of money to brokers when buying insurance. Finally, he develops a strategy not to lose money to the banks.

According to Burton, returns on any form of investment depend mainly on the different events potentially happening in the future. Therefore, one has to learn the ways of accurately predicting the future to their own favor. Malkiel evaluates the different forms of investment that took place in the various periods. Notably, according to the author, the 17th century saw the tulip bulbs invention. The innovation created a mad rush in the market, as many people wished to purchase them. In the 18th century, the Bubble of the South Sea was introduced in England. The event changed the investment market. Malkiel further illustrates that the experimentation of biotechnology was dominating the 1980s. The 1990s was the period that the purchase of land in Japan was very popular. It was also in the same period that prices of stocks increased on the global level. The final major change, as presented by the author, was the craze for Internet throughout the world. Thus, the writer reveals different situations when to avoid going with a crowd. The particular event is when it comes to making a decision regarding the investments. According to evidence provided by the author, following a crowd in many cases has led to losses.

Malkiel tries to show the reader of his book the various determinants of market prices for stocks. The first determinant is the expected growth rate of the stock. The second factor is the expectation of the dividends to be paid in the future. The third element is the degree of the risks involved in the investment activity. The forth determinant is the starting level of interest rates in the prevailing market.

Malkiel gave three pieces of advice to the people planning to invest in shares in the near future or later in their life. The author argues that one should buy stocks of a company, which the market expects to have earnings from growth for not less than five years. The second suggestion is that one should never buy a stock that has the market price on the higher level the value upon its foundation. The last advice is that the stocks that have the predictable anticipated level of growth should attract most attention pf the investors.

Malkiel advices his readers to reduce the taxes charged on their incomes, control the risk involved, and increase their personal returns. One of the ways the author recommends is to ensure the available resources in personal benefits, like health. Another way is to determine the goals to achieve through investment. The third advice is to search the ways to legally avoid paying government taxes through buying bonds, which is tax exempt. Moreover, raising the amount of money from your salary towards retirement plan is another secure option.

The forth way recommended by Malkiel is to be competitive. In order to avoid inflation, the investor should choose to have mutual funds for money markets, make deposits, certificates from banks that are exempted from paying tax. Another way to achieve maximum income is through investment in government bonds.

Burton provides four types of bonds. The first type of bond is the zero coupons, which allow the bond holder to lock the highest yields for a given period. The second type of bond is the mutual fund, which gives permission to the bond holders to buy their shares in form of portfolios. The third type is the tax exempt bonds, which favors the people in the society, who are charged high taxes for their earnings. The forth type of bond is the treasury inflation protection securities for the United States.

One of the best ways to invest is venturing into real estate business. Another field that pays well is the market for collectables and expensive stones such as gold and diamonds. The only problem associated with the aforementioned investment opportunity is the risk of storage. Expensive stones are a subject to robbery and breakage when mishandled. Moreover, investing in expensive stones and collectables does not attract any form of dividends. Another problem associated with the trading of collectables and gold is the lack of available markets.

The best way to invest according to Burton is to have a diversified investment plan. The investor incorporates various plans and yields income in different channels. Malkiel argues that the diversified portfolio ensures safety for an investor, since if a loss was to occur in one area, the other investment protects some percentage of the money. Notably, the author recommends that one ought to choose their stokers based on the service they want offered. Moreover, stock brokers give discounts based on the required advice and service.

The writer reveals the information about the returns of stocks and government bonds. Stocks earn long-run returns because of the two main factors. One part is the income in a form of dividends. The other part is rate of growth of the stock’s dividends of that the investor wants to buy in the future. However, the greatest enemy to investment in stocks and government bonds is inflation.

The best way to make an investment plan is to line the goals for investment with the cycle of life. For each plan to realize, the specific assets need to be invested to cater for the need. For instance, investment in zero coupons can help to cater for tuition fees for their children at the maturity date of the asset. The second way to line investment with the cycle of life is the attitude of the prospective investor towards taking financial risks.

The third approach to line investment with the cycle of life is to have a habit of consistency when it comes to keeping savings from a part of one’s income. It is also important for the employed people to confirm if their employers have a saving plan. Having a savings plan with the employer ensures that the money is directly deducted from their income before the salary is paid.

Malkiel further presents the readers with three ways of purchasing stocks. The first method is the No Brainer, where a prospective investor buys stocks in the different available index for funds in form of classes for the listed stocks that contribute the portfolio of the prospective investor.
The second method is referred in the book as, the-do-it-yourself method. In the-do-it-yourself method, the prospective investor is expected to collect their stocks in order to compare them to the yield that has been obtained with index of funds. The index can be either high or in return rates. The last method is the substitute player approach. In the case of its application, the prospective investor is expected to consult a professional, who is in charge of investing activities and mandate the work of analyzing the stocks for the prospective investor to the professional.

Response to the Book

The book A Random Walk down Wall Street written by Burton G. Malkiel is highly educative and informative. It is particularly useful for a business minded person, who is venturing into investment. The book can open the eyes regarding the available options when it comes to investment. The description of the available methods and channels provides the framework for the person, who is new to the stock market and investment.

After reading Malkiel’s book, I felt empowered and ready to venture into the field of investing. I used to think that a large capital is required to be able to buy stocks. However, Malkiel has opened my eyes through presenting the option of zero coupons, which are the investments that are locked for a certain period of time to mature. The author educates the readers about the types of bonds available and how to play in the bond market.

The book explained the speculation methods in the buying and selling of stocks. The author has clearly shown through the use of graphs and research work how to anticipate a rise in the stocks of a certain company. Moreover, he has clearly explained how to differentiate which stocks are likely to fall in price in the near future. Finally, the newcomer in the stock market can learn the best time to make a purchase of stocks by using speculation.

The next benefit of the book is that it is beneficial to the older population. The author clearly presents a retirement plan for the employed people. He presents in a comprehensible manner the different approaches to the retirement plans and their benefits. Thus, every reader can be equipped with data before starting and opening a retirement plan for themselves. The great illustration of the insurance covers available in the market as well as the rates of tax that the incomes attract makes the information useful for every generation.

Malkiel describes clearly the relevance of mortgages and how to get the most appropriate options that will not affect the future generation, in case a person chooses to take a mortgage. The book educates the people on the ways to avoid losing their money to banks when making a purchase of insurance covers. When the author talks about the returns on any form of investment, he illustrates how dependent it is on the different events that can happen in the future. Therefore, the writer advocates that one has to learn the ways of accurately predicting the future to their own favor in order to collect investment income.

The author gave three pieces of advice to the people, who are not experienced in the stock market, but plan to invest in shares in the future. He suggests starting to buy stocks of a well-known company that the market expects to have earnings from growth for not less than five years. Thus, the new investor should buy the shares of the average long-run businesses. The second suggestion is to never buy stock for more than the price of the value given to the stock by its firm in its foundation. The last advice was that one should for stocks which investors can be able to predict the anticipated level of growth for the stock. Therefore, based on the aforementioned suggestions, any investor can have some pointers in the financial markets.

The advice given by Malkiel on how to invest in shares, the reader can discover that the best choice to involve a professional when venturing into investment. However, it is possible to undertake the effort to analyze the available information and do self-education on the stocks available. Notably, I also learnt from A Random Walk down Wall Street that I had to exercise caution in carrying out the research, since speculation on the market requires keen and thorough attention to possible bubbles and online failures.

The book is easy to understand because the author uses the famous characters and personalities as examples. It was easier for me to understand the concepts that Malkiel presented in his book such as speculation due to the characters used as examples, and the description of their characters, behaviors and decisions.

In the book A Random Walk down Wall Street, Malkiel tries to illustrate to the reader the available diverse determinants of market prices of stocks for investment. Thus, the author is a perfect teacher and the book is a great introductory course for the investors. When the writer talks about the first determinant as being the expected rate of growth of the stock, in the back of my mind I cannot stop but relate the information to the aspect of speculation. When Malkiel talks about the second determinant being the expectation of the value of dividends to be paid the concept of holding stocks relates to the ideas.

Moreover, when Malkiel describes the third determinant being the degree of the risk involved, the reader should connect the issue of carrying out thorough analysis before investing in the stock. Finally, when he evaluates the forth determinant as the level, at which interest rates in the current prevailing market were, his book gives the corresponding data about the ways to evade taxation by the government using the legal methods. Thus, it correlates the different financial aspects and advice to create the full picture.

The book seems to be a crucial written tool for helping people who want to venture into investment as individuals or as a group. The book offers counseling on issues relating to finance and the strategies to follow in order to grow the monetary funds for one’s family. According to the writer, the capacity of an individual to venture into the world of investments and be successful is directly proportional to the prospective investor’s age and the ability of the investor to work and earn the stable income.

The writer in his book A Random Walk down Wall Street reveals that the risk that is involved in one investing in many available options for allocating the money decreases depending on the amount of time the preferred form of investment is expected to be in the hands of the prospective investor. Thus, Malkiel suggests to potential investors to choose their options with reference to their age, knowledge, capabilities and risk tolerance. Moreover, the writer gives an investment plan for people of different age groups in his book.

I find the book by very interactive and filled with useful research, actual data and comprehensive analysis. The book can carry both experienced and new investors through the changes that have occurred in the past as well as the recent events. Finally, the writer finishes with the current state of things in the field of finance.

The introduction of index mutual funds, finances for emerging markets, income that are subject to exempt from tax, notes of floating rates and securities to protect individuals against inflation. All in all, the book A Random Walk down Wall Street by Malkiel very educative. I would suggest reading the book to all people, who are interested in finance, as the concepts presented educate in the easy and comprehensible manner.