I am re-reading (again) “A Random Walk Down Wall Street,” by Burton Malkiel (2012 edition), the investing classic that champions buying and holding index funds for investors rather than trying to beat the market. The last time* I read “Random Walk” was late 2019, before the Pandemic, before inflation reared its ugly head, before interest rates rose, and before the current Bear Market that started last year. 2019 feels like a whole other world.
Having gone through the past three years, I now have more understanding as I read the book. In no particular order, here are my thoughts on certain topics, with specific quotes as prompts:
It may well be that little or no inflation will occur during the first decades of the twenty-first century, but I believe investors should not dismiss the possibility that inflation will accelerate again at some time in the future.p29
When I first read “Random Walk,” I hadn’t experienced the immediate effects of inflation on purchasing-power. In fact, inflation was rather conceptual. Malkiel helped me understand it with a vivid juxtaposition of how the prices on common day items such as Hershey bars and gas multiplied many times over the years. This prepared me for the idea of high inflation. But it wasn’t until last year that I (and millions of others) started to really see it for the first time. Now I’ve experienced the doubling of the price of eggs and oatmeal at Costco, and the rise of gas as high as $6 a gallon (and thankfully back down again).
Side note: one silver lining of inflation has been I-Bonds, which we have been buying since spring of 2021. Recently they offered nearly 10% interest. Now they are still respectable at over 6%.
Interest rates, if they are high enough, can offer a stable, profitable alternative to the stock market. Consider periods such as the early 1980s…The expected returns from stock prices had trouble matching these bond rates; money flowed into bonds while stock prices fell sharply.p128
My first times reading “Random Walk,” I did not understand how impactful interest rates are on both the bond and stock markets. That is because I hadn’t experienced it first hand. In the last year or so, however, interest rates have been the primary driver in changes in stock prices and bond yields. It has been amazing to watch bonds, which in many cases yielded very little a couple years ago, suddenly become competitive with stocks, whose prices have fallen dramatically.
On the cash side, it has also been interesting to watch our savings accounts move from yielding 2% back in the pre-Pandemic environment of 2019 to 0% in 2020 when the Fed dropped rates to help with liquidity, and now nearly up to 4% as the Fed raises rates again.
Pointlessness of Trying to Beat the Market
What are often called “persistent patterns” in the stock market occur no more frequently than the runs of luck in the fortunes of any gambler. This is what economists mean when they say that stock prices behave very much like a random walk.”p141
A main thesis of “Random Walk” is the futility of trying to beat the market and the wisdom of instead investing in index funds. I always took this to heart, and have made it the centerpiece of our investing. However, it is a still a nice reminder.
Most recently, I was tempted to buy depressed tech or communication sector funds, which were pummeled in 2022. I liked the idea of buying on severe discounts, a la Sir John Templeton. However, in thinking it through, I realized that the possible benefits of doing this were outweighed by the cost of messing up my elegant, no-brainer asset allocation (!). As tempting as it is to buy funds that are highly discounted, I do not want to give up my simple system of continuing to grow my ownership of a few select funds.
It also so happens for the past year I have not made changes to my allocation. Although I reserve the right to in the future, at present I want to maintain the current strategy.
The actions of individual investors are often irrational, or at least not fully consistent with the economist’s ideal of optimal decision making.p254
Since the beginning of my study of investing, I have been keenly aware of how investors can make damaging decisions to their investments. I was skeptical of my own brain and determined to arm myself with the best tools to succeed as an investor. The mental training I received from “Random Walk” and other financial books was a valuable foundation. In 2020 I first experienced true market volatility. Last year I got to put my investing mettle to the test with a true bear market. I am glad that I have continued to make smart decisions, to stay the course, and to come out so far unscathed…and with a minimum of regret.
Meanwhile, I appreciate the reminders from “Random Walk.”
*And I previously blogged about it in these posts: