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.

Combine the urge to “get rich quick” with unethical practitioners, contradictory financial advice, and the sheer abundance of information available, and it’s not surprising that humans have been shockingly consistent in repeating the same financial mistakes over and over again. That’s why to highlight the common aspects of economic failures, Malkiel has to start from the very beginning of modern finance – the Tulip Bulb Craze in 17th century Holland.

With over 1.5 million copies sold, A Random Walk Down Wall Street is written for all levels of readers, “whether you are thinking about your first 401k contribution, contemplating retirement, or anywhere in between.” Along the way, you’ll learn about topics from insurance and income taxes to common stocks — “an investment medium that has not only provided generous long-run returns in the past, but also appears to represent good possibilities for the years ahead.”

This post only covers Part One of A Random Walk Down Wall Street, which discusses the histories of economic bubbles and mass-public investing mistakes. As Malkiel says, “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!

Firm Foundations & Castles-In-The-Air
The Madness Of Crowds
Early History
1960s – 1990s
2000s
Summary

Firm Foundations & Castles-In-The-Air

Investing = purchasing assets to gain profit from predictable income and/or appreciation over the long term
- Speculation = buy hoping for a short-term gain over the next days / weeks
- Future cannot be predicted based on past
Short-run changes in stock prices are unpredictable
- A blindfolded monkey throwing darts at stock listings could select a short-run portfolio as well as experts
Invest to maintain purchasing power or you’ll have an ever-decreasing standard of living (due to inflation)
- $100 in 1962 = $855 in 2021
- $1 in 1802 = less than 5¢ today
Firm Foundation Theory
- Each investment has an intrinsic value measurable by analysis of present conditions + future prospects
- When market prices fall below intrinsic value, a buying opportunity arises because fluctuation will eventually be corrected (& vice versa)
Castle-in-the-Air Theory
- Investors should analyze how “the crowd” is likely to behave
- Importance of expectations, not intrinsic values (build “castles-in-the-air”)
- Investment is worth a certain price to a buyer because they expect to sell it for more

The Madness Of Crowds

Greed = feature of every bubble
- Participants ignore intrinsic values to build castles-in-the-air – few escape in time
Many skyrocketing markets rely on purely psychic support
- Unsustainable prices may persist for years, but eventually they realign with true value
It’s not hard to make money in the market — What’s hard is avoiding the temptation of short, get-rich-quick, speculative activities
- Consistent market losers are those unable to resist
- Buy & hold a broad-based portfolio → generous long-run returns
Transformative innovations usually don’t justify early price crazes
- Key to investing → not how much the industry will grow / affect our country, but ability to make + sustain profits

Early History

The Tulip-Bulb Craze

Holland 1593 – tulips imported & became popular for gardens (More bizarre the bulb → more expensive)
As bulb prices rose, more people viewed them as smart investments
- Everyone – nobles, farmers, merchants – began to speculate in bulbs
- People started to leverage belongings like land and jewels for more bulbs
- One sailor accidentally ate a tulip bulb. That “weird-looking onion” would have fed the whole ship’s crew for a year – he was thrown in prison on a felony charge
Downfall
- Prices rose 20x in January of 1637
- A few people sold their bulbs and a snowball started
- Panic reigned – prices fell over 20x in February
- Bulbs became almost worthless, selling for the price of an onion

The South Sea Bubble

1711 — London-based South Sea Company
- Management had 0 experience in trade
- Not profitable – shipwrecks, wars, logistics, etc
Directors bought impressive houses & incredibly-furnished boardrooms to portray success
- South Sea Company offered to fund the entire national debt
- Stock rose overnight from £130 to £300
- Even the king bought £100,000 worth, Parliament signed on
- Stock price hit £1,000
Other financial projects started popping up, called “bubbles”
- Total market value in France was 80x all gold & silver in the country
- Everything from turning sawdust into boards to making saltwater fresh (the more fraudulent, the better it seemed)
Downfall
- Directors sold out, panic ensued
- Stock fell from £1,000 to under £100
- Complete collapse of public credit was barely averted
- Parliament forbade stock issuances for over 100 years

The Great Depression

1920s — America had been experiencing unseen-before prosperity
1928 — stock market speculation became a national pastime
- Rise from March 1928 – September 1929 = entire rise from 1923 – 1928
- Stocks sometimes rose 10-15% a day, many 150-400% within 1 ½ years
- Buying on margin increased dramatically
Investment pools artificially rose prices
- Companies sold stock back & forth at slightly higher prices to give illusion of activity
- Activity + news coverage made public buy
- As public buys, the pool sold
September 3, 1929
- Market peaked
- Business activity had fallen months before
- September 5 — “Babson Break”, many large companies lost 6-9%
October 24, 1929 (Black Thursday)
- Down 11% at opening with 3x normal volume
- Fell $5-10 dollars on each TRADE
October 28, 1929 (Black Monday)
- Declines led to margin calls, self-sustained selling wave
- Dow dropped 13%
October 29, 1929 (Black Tuesday)
- 16.4 million trading volume (equivalent to multi-billion day now)
- Dow Jones fell another 12%
Started the most devastating depression in history
- By mid-November, Dow had lost half its value
- By the low in 1932, most blue-chips had fallen 95%+
- Dow didn’t return to pre-crash highs until 1954

1960s – 1990s

Growth-Stock / New-Issue Craze

“Tronics Boom”
- Profit didn’t matter if company sounded electronic
- American Music Guild changed name to Space-Tone = stock rose from $2 to $14
- P/E of companies like IBM & Texas Instruments were 80+
- Most new issuances in history
Boonton Electronic Corp → Offered @ $5.50, traded first day @ $12, within a year over $24
1962 — prices realigned to normal

Conglomerate Boom

Acquisition process itself produced growth in earnings per share
- Automatic Sprinkler Corp → sales 1963 – 1968 rose 1,400%+ solely due to acquisitions (stock rose from $8 to $73)
Downfall
- Acquisitions can’t keep growing exponentially
- Litton Industries – one of largest conglomerates – reduced earnings expectations (Had recorded 20% yearly increases for a decade)
- Started selling wave — conglomerate stocks declined by ~40%
- FTC investigated, stocks crashed further, merger laws created

Bubble in Concept Stocks

Funds started buying stocks with exciting concept & story — not after financials were proved
- Companies would sell a story, not numbers (fraud was common)
National Student Marketing founded by Cortes Randell
- Had white Learjet named Snoopy, apartment in NYC Waldorf Towers, castle with a mock dungeon in Virginia, private yacht, golden golf clubs, etc
- 1968-1969 → stock $35 + 117 P/E
- 1970 → 87¢

The Nifty Fifty

Walk Street vowed to return to sound principles
- Only invested in “Nifty Fifty” — big caps like IBM, Kodak, Xerox, McDonald’s, Disney
Downfall
- No company can keep up with P/Es of 90+
- 1972 – 1980 P/Es
  - Sony → 92 to 17
  - McDonald’s → 83 to 9
  - Disney → 76 to 11

Return of New Issues

Boom for biotech / microelectronics-sounding companies — like 1960s tech boom
Muhammad Ali Arcades International
- 1 share + 2 warrants cost 1¢… still 333x what insiders paid for true value
Downfall → 90% decline in small company / IPO stocks

Japan’s Land & Stocks

1955-1990 → value of Japanese real estate increased 75x
- Total value of all Japanese property was estimated 20%+ of entire world’s wealth & 2x total value of world’s stock markets
- America is 25x bigger – Japan real estate worth 5x all of America
- Could have bought California just selling Imperial Palace
- Could have bought entire US just selling Tokyo
Stock prices followed, rising over 100x
- Valued over 1.5x US stock market & 45% of global equities
- Sold at 60x earnings, 5x book value, 200x dividends
- Value of NTT was more than AT&T, IBM, Exxon, GE, and GM combined
Downfall
- Inflation started creeping & Bank of Japan raised interest rates
- Stock market fell like the US Great Depression (real estate fared similarly)
  - 1989 → 40,000
  - 1992 → 14,309 (63% drop)
  - 2018 → 21,000

2000s

The Internet Bubble & Yet Another New-Issue Craze

2000 → venture capital firms invested billions in startup internet companies
- Many weren’t profitable a single day
Companies changing to “internet-sounding” name increased in price 125% more than peers (even when they had nothing to do with internet)
People made up new metrics (not profits, P/E, etc)
- “Eyeballs” — how many people viewed webpage
- Telecom companies valued by total miles of fiber optic cable… not miles used (enough fiber was laid to circle Earth 1500 times)
Media flooded public with investment news (Wall Street analysts became household names)
Complete disconnect between valuations & reasonable expectations
- Investor expectations were 15-25%+ per year
- NASDAQ more than tripled from late 1998 to March 2000 — P/E 100+
- Cisco → $600 billion market cap, P/E 196
  - If Cisco grew at 15% & the economy at 5%, Cisco would be bigger than entire economy within 25 years
  - Fell 90%+
- TheGlobe.com → Offered @ $9, first day rose to $97 & $1 billion market cap (with no revenue / profit!)
  - Closed site 3 years later
Downfall
- Largest creation & destruction of stock market wealth of all time
- Equal to year’s output from Germany, France, England, Italy, Spain, Netherlands, and Russia’s combined economies completely disappearing
- Amazon → $75.25 to $5.51 ( 92.7%)
- Priceline → $165 to $1.8 (98.9%)
- JDS Uniphase → $297.34 to $2.24 (99.2%)

The U.S. Housing Crash & Great Recession

Biggest real estate bubble + largest impact for average American (home is largest asset)
New systems of banking were popularized
- Banks sold mortgages to investment bankers, who grouped them & issued securities secured by underlying mortgages (mortgage-backed securities)
- Rated based on claim priority — NOT quality of mortgages
Looser Lending Standards
- Could qualify for a mortgage without showing any income
- Lenders didn’t care about default risk because they would sell mortgage within days
Easier borrowing → Increased housing demand → Increased housing prices (housing price index doubled)
Downfall
- Real estate prices dropped → Homeowners had mortgages more than their house value → many defaulted (affecting mortgage-backed securities)
- As home equity collapsed, consumers stopped spending on other things
- Financial institutions hit hard & stopped lending
- Recession only exceeded in intensity by Great Depression

Bitcoin & Cryptocurrencies

Bitcoin — decentralized digital currency
- Only 21 million tokens in circulation
- Rose from pennies to $60k+ per digital token
- Sometimes fluctuates 50% in days (thousands of dollars)
Blockchain — secure public ledger
- Coded, password-protected, anonymous entries
- Records ownership / transfer of bitcoin
- Maintained by independent computers around world
- Payment for maintaining made in bitcoin (bitcoin mining)
Argument FOR = seamless & anonymous transactions without bank / national currencies
NOT Real Money
- Definition of money → Medium of exchange, Unit of account (yardstick – now and future), Store of value
- Bitcoin = possible medium of exchange but not unit of account / store of value (due to extreme volatility)
Magnitude of increase & volatility suggest large bubble
- Transformative innovations usually don’t justify early price crazes
- Internet was real but still overpriced in late 90s
- 2010 — under 1¢
- 2021 — over $68,000
Mainstream culture craze (just like internet bubble)
- 2nd most-googled news item in 2017
- Superstars endorse
- Long Island Iced Tea Co, unprofitable → name change to Long Blockchain Corp = stock rose 289%

Summary

Greed = feature of every bubble
- Participants ignore intrinsic values to build castles-in-the-air – few escape in time
Many skyrocketing markets rely on purely psychic support
- Unsustainable prices may persist for years, but eventually they realign with true value
It’s not hard to make money in the market — What’s hard is avoiding the temptation of short, get-rich-quick, speculative activities
- Consistent market losers are those unable to resist
- Buy & hold a broad-based portfolio → generous long-run returns
Transformative innovations usually don’t justify early price crazes
- Key to investing → not how much the industry will grow / affect our country, but ability to make + sustain profits

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