Learning From Literature

A Random Walk Down Wall Street by Burton Malkiel

Cover of A Random Walk Down Wall Street by Burton Malkiel

A Random Walk Down Wall Street: The Time-Tested Strategy For Successful Investing by Burton Malkiel is a personal finance book originally published in 1973 and revised most recently in 2023.

Get-rich-quick thinking, shady advisors, and overwhelming, conflicting financial advice have led people to repeat the same money mistakes for centuries. That’s why Malkiel begins A Random Walk Down Wall Street with the Tulip Mania of 1600s Holland – one of the first economic bubbles – to show that these behaviors aren’t new.

With over 1.5 million copies sold, this classic is for everyone — whether you’re starting your first 401(k) or nearing retirement. While it touches on everything from insurance to gold, its focus is on common stocks as the most promising long-term investment.

This summary covers Part One, which explores the history of bubbles and public investing blunders; “If we do not learn from the lessons of the past, we will be doomed to repeat the same errors.”

Purchase the book by clicking this link!

Enjoy!

Table of Contents

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Firm Foundations & Castles-In-The-Air

  • Investing → Buying assets for long-term income or value appreciation
  • Speculation → Buying assets for short-term gain (days/weeks)
  • Markets are unpredictable in the short term
    • Past performance doesn’t predict the future
    • Even experts can’t consistently outperform randomness
  • Investing protects against inflation
    • $100 (1962) = $855 (2021); $1 (1802) = <5¢ today

The Madness Of Crowds

  • Greed drives every market bubble
    • Intrinsic values are ignored in favor of crowd hype
    • Most can’t escape before the crash
  • Price surges often rely on emotion, not fundamentals
    • Bubbles might last years, but always correct themselves
  • Hard part of investing → resisting speculation
    • Buy & hold broad-based portfolios for long-term gains
    • Speculators consistently lose over time
  • Big innovations rarely justify early market frenzies
    • Key question: Can the industry generate and sustain profits?

Early History

The Tulip-Bulb Craze
  • Tulip Mania (Holland, 1593–1637)
    • Tulips became trendy; rare bulbs fetched high prices
    • Seen as investments → everyone joined in, even leveraging assets
    • One sailor ate a bulb, mistaking it for an onion – jailed for a felony
  • Downfall
    • Prices rose 20x in January, then collapsed over 20x in February
    • Panic-selling turned bulbs nearly worthless, some sold for onion prices
The South Sea Bubble
  • South Sea Bubble (1711, London)
    • South Sea Company had no trade experience; ventures failed
    • Lavish image portrayed success while hiding lack of profitability
    • Offered to take on the national debt → stock soared (£130 → £1,000)
    • King and Parliament invested; stock mania spread
    • Dozens of wild “bubble” companies emerged – many fraudulent
  • Downfall
    • Directors cashed out → panic followed
    • Stock crashed to under £100
    • Credit crisis nearly erupted; Parliament banned stock issuance for 100+ years
The Great Depression
  • 1920s Stock Market Boom
    • Massive prosperity → speculation craze by 1928
    • Stocks surged 150–400% in 18 months; some up 10–15% in a day
    • Buying on margin soared; investment pools manipulated prices
    • Pools traded among themselves to fake activity → public bought in
    • When public rushed in, pools sold out
  • Crash of 1929
    • Sep 3: Market peaked, but economy was already declining
    • Sep 5: “Babson Break” – major stocks dropped 6–9%
    • Oct 24 (Black Thursday): Down 11%, volume tripled
    • Oct 28 (Black Monday): Margin calls → 13% drop
    • Oct 29 (Black Tuesday): Record trading, Dow fell another 12%
    • By Nov: Dow halved
    • By 1932: blue-chip stocks down 95%+
    • Market didn’t recover until 1954

1960s – 1990s

Growth-Stock / New-Issue Craze
  • The “Tronics Boom” (Late 1950s–Early 1960s)
    • Hype around anything sounding electronic – profits didn’t matter
    • American Music Guild renamed to Space-Tone → stock jumped from $2 to $14
    • P/E ratios for tech giants (IBM, Texas Instruments) hit 80+
    • Record number of new stock issuances
    • 1962 market correction
Conglomerate Boom
  • Conglomerate Boom (1960s)
    • Companies grew earnings per share by acquiring others
    • Automatic Sprinkler Corp: Sales rose 1,400%+ (1963–1968) solely via acquisitions → stock jumped from $8 to $73
  • Downfall
    • Growth through acquisitions wasn’t sustainable
    • Litton Industries: Cut earnings expectations after a decade of 20% annual growth → triggered broad selloff
    • Conglomerate stocks dropped ~40%
    • FTC launched investigations → stocks crashed further → merger regulations introduced
Bubble in Concept Stocks
  • Story Stocks Craze (1960s)
    • Funds chased exciting concepts and narratives over proven financials
    • Companies prioritized hype over performance – fraud was common
  • National Student Marketing (Cortes Randell)
    • Lavish image: Learjet “Snoopy”, NYC apartment, Virginia castle, yacht, golden golf clubs
    • Stock soared to $35 with a 117 P/E ratio (1968–1969)
    • Crashed to 87¢ by 1970
The Nifty Fifty
  • Nifty Fifty Era (1970s)
    • Wall Street shifted to “safe” blue-chip investing after earlier crashes
    • Focused on large, reputable companies (Kodak, Xerox, McDonald’s, Disney)
    • Valuations soared – some P/E ratios hit 90+
  • Downfall (1972–1980)
    • No company could sustain such high expectations
    • Massive P/E compression:
      • Sony → 92 to 17
      • McDonald’s → 83 to 9
      • Disney → 76 to 11
Return of New Issues
  • Biotech/Microelectronics Boom (1980s)
    • Similar to 1960s tech boom
    • Companies with tech-sounding names skyrocketed, e.g., Muhammad Ali Arcades International
      • 1 share + 2 warrants cost 1¢… still 333x more than true value
  • Downfall
    • 90% decline in small company/IPO stocks after the hype collapsed
Japan’s Land & Stocks
  • Japanese Real Estate Boom (1955-1990)
    • Real estate value increased 75x
    • Total value = 20%+ of global wealth, 2x the whole world’s stock markets
    • Japan’s real estate worth 5x that of America
    • Just the Imperial Palace could’ve bought California – Tokyo real estate could’ve bought the entire US
    • Stock prices surged over 100x, surpassing US stock market value
      • NTT valued more than AT&T, IBM, Exxon, GE, and GM combined
      • Extreme valuations: 60x earnings, 5x book value, 200x dividends
  • Downfall
    • Bank of Japan raised interest rates
    • Stock market and real estate crash similar to US Great Depression
    • 1989: Stock market at 40,000
    • 1992: Dropped to 14,309 (63% drop)
    • Still has not re-reached the peak… almost 40 years later

2000s

The Internet Bubble & Yet Another New-Issue Craze
  • Dot-Com Bubble (2000)
    • Venture capital firms invested billions in startup internet companies (many unprofitable)
    • Companies changed names to “internet-sounding”, raising stock prices by 125%
    • New metrics like “eyeballs” (website views) were used instead of profits or P/E
    • Telecom companies valued by miles of fiber optic cable laid, not used
    • Media and Wall Street analysts fueled the hype
    • Investor expectations were surveyed at 15-25%+ annually
    • NASDAQ tripled from late 1998 to March 2000; P/E ratios above 100
    • Cisco had a $600 billion market cap with a P/E of 196, suggesting it could surpass the entire economy
    • TheGlobe.com rose from $9 to $97 on its first day with no revenue or profit, closed 3 years later
  • Downfall
    • Largest stock market wealth destruction in history
    • Loss equivalent to the combined GDP of Germany, France, Italy, Spain, Netherlands, and Russia
    • Major stock declines:
      • Amazon: $75.25 → $5.51 (92.7% drop)
      • Priceline: $165 → $1.8 (98.9% drop)
      • JDS Uniphase: $297.34 → $2.24 (99.2% drop)
The U.S. Housing Crash & Great Recession
  • Real Estate Bubble (2000s)
    • Homeownership = largest asset for most Americans
    • New banking systems: Banks sold mortgages to investment bankers, who grouped and issued mortgage-backed securities
    • Securities rated based on claim priority, not mortgage quality
    • Lenders didn’t care about default risk, as mortgages were sold quickly
    • Easier borrowing allowed mortgages without income verification
    • Increased demand for housing → Home prices doubled
  • Downfall
    • Real estate prices dropped → Many homeowners had mortgages exceeding house values → Defaults increased
    • Mortgage defaults affected mortgage-backed securities, leading to a collapse in financial institutions
    • As home equity collapsed, consumer spending declined
    • Financial institutions stopped lending → Severe recession (second only to the Great Depression)

Summary

  • Greed is a key feature of every financial bubble
    • Participants ignore intrinsic values and build speculative “castles-in-the-air”
    • Few can escape in time as prices rise due to pure psychological support
    • Unsustainable prices may persist but eventually realign with true value
  • Investment Approach
  • Transformative Innovations & Price Crazes
    • Revolutionary innovations don’t always justify early price crazes
    • Focus on a company’s ability to sustain profits, not industry growth potential alone

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