A Random Walk Down Wall Street by Burton Malkiel

A Random Walk Down Wall Street by Burton Malkiel describes how markets tend to reflect available information so quickly that beating them consistently is almost impossible. He breaks down investment fads and demonstrates how patterns that look meaningful often collapse under real data. By stressing discipline and diversification, he shows how ordinary investors can build wealth without illusions of control.

Investing Foundations

• Foundational Principles
  • Investing → Buying assets for long-term income or appreciation
  • Speculation → Buying assets for short-term gain
  • Markets are unpredictable in the short term
  • Past performance does not predict future performance
  • Experts can’t consistently beat randomness
• Greed is the defining feature of every financial bubble
  • Intrinsic value is ignored in favor of hype
  • Price surges are emotional, not fundamental
  • Bubbles can last years – but always correct
  • Most don’t escape before the crash
• Making money in the market isn’t hard
  • Hardest part → resisting speculation
  • Speculators consistently lose over time
  • Big innovations don’t auto-justify the early frenzy
  • Key question: Can the industry generate and sustain profits?
  • Buy & hold diversified portfolios for the long-term

Early History

• Tulip Mania (Holland, 1593-1637)
  • Became a status symbol; rare bulbs were worth extreme prices
  • Reframed as “investments,” drawing in the general public
  • People leveraged homes, land, and savings to buy
  • A sailor ate a bulb, mistaking it for an onion → jailed for a felony
  • Prices rose 20x in January
  • Prices fell 20x in February
  • Bulbs became nearly worthless, selling for the price of onions
• South Sea Bubble (London, 1711-1720)
  • South Sea Company had little experience but grand public image
  • Promised to take on Britain’s national debt; the King invested
  • Stock price flew from £130 to £1,000
  • Dozens of “bubble companies” formed, many fraudulent
  • Directors secretly cashed out
  • Stock collapsed to below £100
  • Credit crisis nearly erupted
  • Parliament banned new stock issuance for over 100 years
• Great Depression (1921-1954)
  • Stocks surged 150-400% in 18 months
  • Some stocks rose 10-15% in a single day
  • Margin buying exploded
  • Pools traded between themselves to create fake demand
  • Public rushed in at inflated prices
  • Pools sold out during the frenzy
  • Sept 5, 1929: “Babson Break” → major stocks fell 6-9%
  • Oct 24: market down 11%, volume tripled
  • Oct 28: margin calls triggered 13% drop
  • Oct 29: record trading, Dow fell another 12%
  • By November, the DOW had fell 50%
  • 3 years later, blue-chip stocks were down over 95%
  • Market didn’t reach new highs until 25 years later

1960s – 1990s

• Tronics Boom (late 1950s-early 1960s)
  • Hype around anything electronic
  • American Music Guild renamed Space-Tone → stock rose 600%
  • P/E ratios for IBM, Texas Instruments, etc reached 80+
  • Record number of new stock issuances
  • Ended with Flash Crash of 1962 – the S&P 500 fell 22.5%
• Conglomerate Boom (1960s)
  • Companies boosted EPS by acquiring other companies
  • Automatic Sprinkler Corp: sales up 1,400%+ thru acquisitions
  • Litton cut expectations after a decade of ~20% annual growth
  • Triggered a broad selloff – prices fell 40%
  • FTC investigations → further crashes → merger regulations
• Story Stock Craze (late 1960s)
  • Funds chased narratives over fundamentals
  • Hype and fraud were common
  • NSMC (Cortes Randell): Learjet, castle, yacht, golden clubs
  • Stock hit $35 with P/E of 117 – collapsed to $0.87
• Nifty Fifty Era (1972-1980)
  • Shift to “safe” blue chips (Kodak, Xerox, McDonald’s, Disney)
  • Viewed as “one-decision” stocks
  • No company could meet the extreme expectations
  • P/E compression: Sony (92 to 17), McDonald’s (83 to 9), Disney (76 to 11)
• Return of New Issues (Biotech & Microelectronics Boom)
  • Similar to the 1960’s tech boom
  • Tech names popped (e.g., Muhammad Ali Arcades International)
  • 1 share + 2 warrants sold for 1¢… still 333x intrinsic value
  • Small company and IPO stocks fell ~90%
• Japanese Bubble (1955-1992)
  • Real estate values increased 75x – 20% of global wealth and 2x entire world’s stock markets
  • Real estate of Tokyo was priced the same as the entire US
  • Imperial Palace value = all of California
  • Stock prices rose 100x, exceeding US stock market
  • NTT worth more than AT&T, IBM, Exxon, GE, and GM combined
  • Bank of Japan raised interest rates
  • 1989 peak ≈ 40,000
  • 1992 low ≈ 14,309 (63% drop)
  • Market only just now recovered to its peak in the 2020s

2000s

• Dot-com Bubble (late 1990s-2000)
  • Capital poured into internet startups
  • Added internet-sounding names → stock rose ~125%
  • New metrics replaced fundamentals (“eyeballs,” clicks, cable laid)
  • Investor expectations reached 15-25%+ annual returns
  • NASDAQ tripled from late 1998 to March 2000
  • P/E ratios commonly exceeded 100
  • Cisco’s growth, if sustained, would have surpassed entire economy
  • TheGlobe.com went $9 → $97 on Day 1 with no revenue or profit
  • Largest stock-market wealth destruction in history
  • Lost GDP of Germany, France, Italy, Spain, Netherlands, & Russia
  • Amazon: $75.25 → $5.51 (-92.7%)
  • Priceline: $165 → $1.80 (-98.9%)
  • JDS Uniphase: $297.34 → $2.24 (-99.2%)
• Housing Bubble (2000s)
  • Homeownership was largest asset for most Americans
  • Banks sold mortgages to investment banks 
  • Originators didn’t care about default risk (they didn’t hold the loans)
  • Banks bundled mortgages into mortgage-backed securities
  • Ratings were based on claim priority, not loan quality
  • Demand surged → home prices doubled
  • Prices fell → millions owed more than home value (negative equity)
  • Defaults and foreclosures surged
  • Crushed consumer spending
  • Credit markets seized up → deep recession