As a reader of Investors Chronicle, you may feel you have no interest in Professor Burton Malkiel's investment classic, A Random Walk Down Wall Street. You're a stock-picker. You love poring over our snapshots of company results, especially those of obscure companies, hoping to find the inspiration for your next winner. You are probably well aware that your mission is a very challenging one, but you simply enjoy the exercise. Some people like gardening. Some people like horse-racing. And you like stocks.
If you want a manual to help you on your way, then you need Ben Graham's The Intelligent Investor, famously updated in collaboration with Warren Buffett in 1973 (and again by Jason Zweig in 2003). This fine book underwrites your mantra, which is that, however difficult, it is possible to consistently identify individual shares that will outperform the market.
But A Random Walk Down Wall Street, which first appeared in the same year as the Buffett version of The Intelligent Investor, does not absolutely assassinate the idea of stock-picking. In fact, Prof Malkiel even deigns to delineate four stock-picking rules, of which three are endorsed by The Intelligent Investor. Still, its essence is that stock-picking marks the triumph of hope over experience - which is basically true. The evidence is all around you - for example, in the notable statistic on the first page of this book: had you put $10,000 into the S&P 500 index in 1969, and reinvested all dividends, your investment would now be worth $422,000. Had you, instead, invested $1,000 each in 10 typical actively managed investment funds - the very raison d'être of which was to outperform the S&P - your investment would have been worth $284,000. If you don't benchmark your results against an index, would that perhaps be because the result would be disappointing?
Now, a ninth edition of A Random Walk Down Wall Street has just been published. Investment books that last this long are as rare as successful active fund managers. So you should read this book, because it describes, very elegantly, the powerful counter-thesis to your predilection for stock-picking. Understanding this will make you a better investor.
And although much has changed since 1973, quite a lot of A Random Walk Down Wall Street has not. In fact, I have been comparing the first edition with the ninth. Huge swathes of information is identical: eternal truths do not need to be updated. The main evolution of the book over three decades has been the development of its central section, which follows demolition jobs - first on technical analysis, and then, with equal fervour, on fundamental analysis (at least, fundamental analysis as practised by the professionals). These two sections alone are worth the book's price. They wrap up all the main issues, such as randomness, momentum, creative accounting and the conflicts of interest within investment banks. Then, the central section gives you the plain guide to modern portfolio theory, which is the intellectual underpinning of the whole book. This is an MBA in investment without the maths. Here it is in one sentence: because share prices instantly react to all knowable facts about companies' prospects, you cannot beat the market... unless you're Warren Buffett.
Modern portfolio theory was, of course, the underpinning for index funds, of which no-one had heard back in 1973, when the book was first published. Now, however, they are a giant part of the landscape, due, in part, perhaps, to a modest one-page "author's suggestion" in the original edition: "What we need is a mutual fund that simply buys the hundreds of stocks making up the broad market averages, and does no trading... to catch the winners.."
The closing section of A Random Walk Down Wall Street is a comprehensive "practical guide for random walkers", which applies the academic commentary to the business of dealing with your savings, touching on every aspect, including alternative investments, life-cycle investing, the impact of fees, and how the S&P is probably no longer the best index for passive investors - because the very popularity of indexing has inflated its price. Prof Malkiel recommends that you also index smaller stocks.
Overall, A Random Walk Down Wall Street blends history, academic insight, practical advice and an easy-reading style to make a towering exposition of a key investment philosophy. It's not as rigorous as David Swenson's Pioneering Portfolio Management, or Jeremy Siegel's Stocks for the Long Run, and I feel that the professor was just a little lazy in taking all of three lines to dismiss hedge funds. Nevertheless, A Random Walk Down Wall Street should be a required read.
Alistair Blair, a past winner of the Business Writer of the Year Award, has worked in investment banking and fund management. E-mail: a7461blair@pobox.com www.investorschronicle.co.uk/nofreelunch
