A Random Walk Down Wall Street by Burton Malkiel

A Random Walk Down Wall Street by Burton Malkiel offers a time-tested guide to investing. Malkiel traces the history of financial bubbles and common money mistakes to show that market unpredictability has always existed. With practical advice on long-term investing, the book is a comprehensive resource for both new and experienced investors.

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