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A Random Walk Down Wall Street

Revised Edition, by Burton G. Malkiel, 1996, W.W. Norton & Company, 522 p., US$27.50 list.

Random walk is a term describing Brownian motion. Malkiel suggests that it is nearly impossible to predict the direction or amount of the next change in a stock's price or in the stock market as a whole. He provides data to demonstrate that past changes have almost no value in predicting the future. This is an efficient market operating, where any new information is quickly realized in stock prices.

He remarks that the "Value Line estimates have as good a record as any others." Yet, their forecasts have almost no value in predicting future performance. I derived a similar conclusion about 1-1/2 years ago. I suspect that the Timeliness Rating performance touted by Value Line is self-realized: people following and acting upon VL recommendations cause most of the performance.

He cites some of the criticisms of the capital asset pricing model, yet he generally supports it. One interesting remark is about the small firm effect. Historically, small stocks have provided higher returns than large-capitalization stocks. "In the ten years since 1983, after this pattern was discovered, there seems to have been little size effect in the pattern of returns (p. 222)."

This is an excellent and very readable book, with lots of good advice. Also of possible interest are:

Stock Market Probability rev. ed. by Joseph E. Murphy, Jr., Probus Publishing Company, Chicago and Cambridge, 1994, 231 p. This book asserts that step changes (first differences) in the log of price changes is a normal distribution with mean = 0.

Modern Portfolio Theory and Investment Analysis, Fifth Ed., by Edwin J. Elton and Martin J. Gruber, John Wiley & Sons, 1995, 703 p. I'm about halfway through this book which is highly mathematical.

--John Schuyler, July 1996