Professor Burton Malkiel of Princeton University is the author of a very famous investment book, A Random Walk Down Wall Street. The first edition appeared in the early 1970s and it has been so popular that it is now into its 10th edition.
Burton Malkiel is a strong proponent of low-cost indexing and in the enclosed article and interview on Yahoo Finance-he says that investments via passive indexing (including ETFs) are becoming very popular!
Markets may not be 100% efficient-but it doesn’t mean that one can (consistently) beat them or be above average.
Stock prices (into the future) move at random-because news / fresh information (which causes prices to move) hits the market at random. It essentially implies that there are no ‘past patterns’ that can predict the future.
What is not news is already discounted into the prices by the market. This happens because the market is comprised of thousands of competitive, motivated and profit seeking people who do analysis 24*7*365. In other words prices (in the market) already reflect what can be known!
Hence, all that investors need to do is invest into low cost index funds / ETFs for their long-term financial goals and objectives.
And yet active management is hugely popular, people keep trying to beat the market and pay others to do the same ...why? In the words of Burton Malkiel,
“Telling someone that you can’t beat the market, is like telling a six-year old that Santa Claus doesn’t exist,” according to Malkiel. Basically, people deny the facts that show most investors don't make huge profits. He explains that we all keep trying for two fundamental reasons: investing is fun and some people DO make money.
In the market peoples' beliefs are similar to the fable of Lake Woebegon-the fictional land-where all children are ‘above average!’ Unfortunately, in their attempt to chase the rainbow of 'beating the market' many fail to capture the market average return, which over the long term is decent enough to meet many of our financial goals.
According to me, the sage advice of Dr Burton Malkiel is applicable to investors everywhere!
Link to the Yahoo Finance article and interview,
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