A RANDOM WALK DOWN WALLSTREET
…Practical men, who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist. Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back.
* J.M. Keynes
A Random Walk Down Wall Street by Burton G. Malkiel is considered by many to be a groundbreaking look into the world of finance. In this national bestseller, Malkiel argues that markets are efficient and time and time again, when inefficiencies occur, the market will eventually self-correct. Malkiel uses his analysis to provide the reader with a “guided tour of the complex world of finance and practical advice on investment opportunities and strategies.” While Malkiel believes that stock markets are “efficient,” he is also careful to point out that euphoria and despair can take hold of markets from time-to-time. Through a synopsis of Malkiel’s book and a subsequent critique of the ideas therein, this critical book review seeks to analyze, assess and explicate Malkiel’s ideas on investment and the Finance market as a whole.
Malkiel begins by offering overviews two basic stock valuation models — Firm Foundations and Castles in the Air. Firm Foundations says a stock’s value depends on the company’s fundamentals — its business, profitability, growth, etc. and has something of an “intrinsic value.” Most easily illustrated through an analysis of common stocks, Malkiel offers us compelling reason that the greater the present dividends and their rate of increase, the greater the value of the stock.” Castles in the Air says a stock is worth a subsequent investor’s price ceiling. Malkiel’s work continues with a review of bubbles and manias throughout history, from more ancient history like the tulip craze in the Netherlands, the South Sea bubble in England and the 1929 Great Crash in the U.S. all the way to the dot com bubble. The examples that Malkiel offers...