'A Random Walk Down Wall Street' at 50

Princeton University emeritus economist Burton Malkiel, who turns 91 this year, has published a 50th-anniversary edition of his investing classic, A Random Walk Down Wall Street.

Kim Clark, Kiplinger: So much has changed since your first edition — there weren’t even any index funds for individual investors then. What are the best developments for investors you’ve seen in the past 50 years?

Malkiel: Index funds. And Roth IRAs. People ought to use Roths because you can save for retirement in a tax-friendly way — without paying tax on any of the gains. Money market funds are a real boon for investors because bank accounts are earning essentially zero even when short-term interest rates are high. Zero-commission trading is another big deal. Exchange-traded funds allow the individual investor to access funds with zero commissions. These are, without any question, advantages for the individual investor.

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What are the worst changes?

Some trading platforms have marketed themselves as investors’ best friends. They are lovely sites that made it easy and like a game to gamble by buying and selling stock. As you know, I am a buy-and-hold investor. Some of the other things that have led many people to disaster are cryptocurrency, non-fungible tokens (NFTs), and the Reddit mobs.

You wrote another book in 2008 on investing in China. Have your views on international investing changed?

I still recommend that you have some international diversification and some exposure to emerging markets. The valuations are very much more attractive in emerging markets than they are in the United States right now. Fifteen years ago, I would have said if you’re in one emerging market country, you should be in China. I’d probably pick India today. I may be a little less optimistic about China than I have been in the past. A number of things President Xi Jinping has done have not been helpful. I think there will be stronger growth in India.

We had a pullback in stocks in 2022. But price-earnings ratios for the broad market still average about 17, higher than the historical average. And when you first wrote your book in 1973, the stock market’s average dividend yield was greater than 3%. Now we’re at half that. What do these valuation measures tell us about the stock market’s outlook?

Even with the decline, valuations are far less attractive than they’ve been. And while nobody can predict what the stock market is going to do over the short run, I think we’re going to have a tough market. Generally, when valuations are stretched, you don’t get 9% or 10% annualized returns. You’re much more likely to be in the 6% area. But that doesn’t mean you should say “Oh my God, I don’t want common stocks anymore!” Stocks are the only things that, reliably, in good times and bad, have rates of return that exceeded inflation in the long run.

If the overall market is still expensive, why should people put their money into a broad index fund? Why shouldn’t they just buy bargain stocks or a value fund?

Because we know perfectly well that over the long haul, that simply doesn’t work. The evidence is very clear. Over the long term, the old, boring total stock market index fund is the winner because the market is a random walk. S&P Dow Jones Indices publishes something called a SPIVA report [SPIVA is an acronym for S&P Indices Versus Active]. On average, two-thirds of active managers are beaten by the index in any given year. And the ones who beat the index in one year are not the same ones who beat the index the next year. When you compound that over 10 years, you find that 90% of funds don’t beat the index. And let me just conclude by mentioning one person who has beaten the indexes over his lifetime: Warren Buffett. Buffett has told his trustees he wants his estate invested in index funds. That’s a very good example of how even the guy who has actually done it knows perfectly well how hard it is and how unlikely it is that anyone’s going to do it in the future.

Another big change in 50 years is the growth of research in behavioral finance. How has that changed your advice?

It’s very important to know about behavioral finance, know the biases we have, know how difficult it is for us to keep on track when, as Pogo would say, you know the enemy and realize it’s us. Just as it is hard for people to stay on a diet, it’s hard for people to save regularly because when the sky is falling — when it’s 2007 and the whole world’s financial system is falling apart — you say, “Oh, no, no. I’m not going to put money in now.” That is exactly the time when you should put money in.

One of the things that’s new in this edition of the book is an understanding that dollar-cost averaging can really help. If you are regularly investing when the market is down, you’re buying more shares. We had a terrible time at the beginning of the 21st century [from 2000 to 2009]. The S&P 500 index was the same at the end of the period as it was at the beginning. But the investor who contributed regularly, dollar-cost averaged, and reinvested dividends actually made more than 5% on average per year. That’s pretty darn good.

The new edition gives an example of somebody who put a bit more than $20 a week into a total stock market index fund starting in 1978, shortly after index funds were first available from Vanguard. That person today would have $1.5 million. Wow! What I think is the most important lesson is that for people of modest means, who’ve never had big salaries, my book shows that they could accumulate a massive amount of money for retirement. What pleases me more than anything else is the letters I get from people who say that they read an earlier edition of the book, did exactly what I said, and they find now, much to their amazement, they have a comfortable retirement.

Your advice is that everybody should put their money in index funds. But you like to play the market a little bit. Could tell us one or two stocks that you like right now?

I enjoy gambling, and I enjoy buying individual stocks. But I can do it because my 401(k) plan is completely invested in index funds. So if you’ve got enough for a comfortable retirement all saved in index funds and you want to have fun and buy individual stocks, by all means, go and do it. I will not answer the question because I don’t think I do any better than average with the stock picks that I have. I do it because it’s fun.