Author: Burton G. Malkiel is Professor Emeritus of Economics at Princeton University, former Dean of the Yale School of Management, and a member of both the Council of Economic Advisors and the boards of directors of various corporations like Vanguard and Prudential Financial.
Book: The book explains the basic terminology, products, strategies, and interests of Wall Street with a clear bias toward the Efficient Market Hypothesis. The author offers a high-level view of (i) The history of the stock market and speculative bubbles, (ii) Main techniques and methodologies used by professional investors, (iii) Modern Portfolio Theory, Behavioural finance, and new methods for portfolio construction – Smart Beta and Risk Parity, and (iv) A guide to investing for those who adhere (or not) to the random walk theory.
Opinion: I see this book as financial literacy 101. In fact, this was one of the first books I read on finance, and I think it is one of the most complete guides to the industry out there along with Stocks for the Long Run. Even if it may sound repetitive in some instances (i.e., when showing evidence of index investing as the best alternative for retail investors…), it is the perfect book for laymen and students that have not yet been introduced to the “investment business”. However, on the negative side, I do not agree with Malkiel on two main ideas: (i) It seems to me that he ignores the role of central banks as the responsible for market distortions, malinvestment, and subsequent speculative bubbles. His analysis is focused on whether Central Banks should respond to movements in asset prices, and not on their role in the origination of those movements. (ii) I see a contradiction in his view of the Efficient Market Hypothesis - i.e., in the 15th chapter he gives “useful stock-picking advice”, weren´t markets discounting all available information? Even if he may admit that markets stop being efficient during speculative bubbles, his advice to outperform the market applies to normal times... That´s pointless if markets followed a real random walk...
Pd: (i) The first critic may apply more to his papers rather than to the book. (I) The second critic is also shared by Andrew Lo on his book “Adaptive Markets”. (iii) I also do not agree with his view of MPT tools to asses risk-reward relationships and portfolio construction. But I do agree that index Investing is the best alternative fo
r most retail investors.
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