A Random Walk Down Wall Street

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🎯 The Book in 3 Sentences

💡 Key Takeaways

Don’t do technical analysis and don’t buy and sell.
You can’t beat the market.
Don’t follow the crowd.
Start saving early and regularly.
Invest in regular amounts and rebalance every year.
Until the forties: 70% stocks, 15% bonds, 10% real estate, and 5% cash.

✏ Top Quotes

October. This is one of the peculiarly dangerous months to speculate in stocks in. The others are July, January, September, April, November, May, March, June, December, August, and February.

Timeless lessons involve broad diversification, annual rebalancing, using index funds, and staying the course.

When investors are overly focused on avoiding losses, they may make irrational decisions such as holding onto losing investments for too long or selling winning investments too early.

📝 Summary + Notes

Part 2: How the pros play the biggest game in Town

5. Technical and fundamental analysis

Technical analysis is the method of predicting the appropriate time to buy or sell a stock by interpreting charts.
Fundamental analysts care little about the pattern of past price movements and seek to determine a stock’s proper value. Value in this case is related to a company’s assets, its expected growth rate of earnings and dividends, interest rates, and risk.

Why technical analysis works

Each time the resistance area is reached and the stock turns down, the resistance level becomes harder to cross because more investors get the idea that the market or the individual stock in question cannot go any higher.
A support area that holds on successive declines becomes stronger and stronger.

Why technical analysis does not work.

Chartists often miss the boat. By the time an uptrend is signaled, it may already have taken place.
Traders tend to anticipate technical signals. If they see a price about to break through a resistance area, they tend to buy before, not after, it breaks through. This suggests that others will try to anticipate the signal still earlier.

The fundamentalist uses four basic determinants to help estimate the proper value for any stock:

The expected growth rate. A rational investor should be willing to pay a higher price for a share the longer an extraordinary growth rate is expected to last.
The expected dividend payout. A rational investor should pay a higher price for a share, other things equal, the larger the proportion of a company’s earnings paid out in cash dividends or used to buy back stock.
The degree of risk. A rational (and risk-averse) investor should pay a higher price for a share, other things equal, the less risky the company’s stock is.
The level of market interest rates. A rational investor should pay a higher price for a share, other things equal, the lower the interest rates.
Buy only companies that are expected to have above-average earnings growth for five or more years.

6. Technical analysis and the random-walk theory

Don’t do technical analysis and don’t buy and sell. Even if you make money, fees, and taxes does not worth it. Buy and hold.

7. How good is fundamental analysis? The efficient-market hypothesis

Fundamental analysis is no better than technical analysis.

Part 3: The new investment technology

8. A new walking shoe: Modern portfolio theory

Diversify.

9. Reaping reward by increasing risk

A perfect risk measure does not exist.

10. Behavioral finance

Don’t be overconfident and over-optimistic (avoid overtrading).
You can’t beat the market.
Herding behavior (avoid it):
- Is driven by emotion: Follow the crowd because of FOMO.
- It can lead to market bubbles and crashes.
By understanding their own biases and emotions, investors can make more informed investment decisions and potentially improve their investment returns.
Be rational and don’t have emotions.

11. Is “smart beta” really smart?

Part 4: A practical guide for random walkers and other investors

12. A fitness manual for random walkers and other investors

Start saving early and regularly.
Have insurance and savings for 6 months.
Own your own home, if you can afford it.
Own some REITs in your portfolio.
Maybe own 5% in gold.

14. A life-cycle guide to investing

History shows that risk and return are related.
The risk of investing in common stocks and bonds depends on the length of time the investments are held. The longer, the lower the variation in the asset’s return.
DCA can be a useful technique to reduce the risk of stock and bond investment.
Rebalancing can reduce risk and in some cases increase returns.
Save/invest persistently in regular amounts, no matter how small.

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15. Three giant steps down wall street

The most simple strategy is to buy Index. Reasons to buy index funds:
- Exceed return of most active managers.
- Low management fees and trading costs.
- Tax friendly.
- Provide diversification.
- Require no effort.
S&P 500 is not enough as it doesn’t track everything. You can go with Russell 3000 or Wilshire 5000 Total Market Index or CRSP Index, or MSCI U.S. Broad Market Index.
Have a non-US Index, e.g. EAFE (Vanguard Europe Pacific VEA ETF) or MSCI emerging-markets Index (Vanguard Emerging Markets VWO ETF).
Have also REIT Index and Total Bond Market Index.

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