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  • Stock Price Movements Are Unpredictable

    by Charles Rotblut, CFA and Burton Malkiel, Ph.D.

    Stock Price Movements Are Unpredictable Splash image

    Burton G. Malkiel is a professor of economics at Princeton University. The 10th edition of his widely read book, “A Random Walk Down Wall Street: The Time-Tested Strategy for Successful Investing” (W. W. Norton & Company, 2011), was published in January. I spoke to him about the case for using index funds.

    —Charles Rotblut, CFA

    Charles Rotblut (CR): Could you explain the term “random walk”?

    Burton Malkiel (BM): Basically, the concept is not that the market is random or capricious, really, just the opposite: that the market is quite efficient in reflecting new information and when news arises that’s true news, the market adjusts without delay. The true news is unpredictable—in other words, if we have a headline today that says “New York digs out of yesterday’s storm,” that’s not news. What was news is that the storm was much bigger than anybody had predicted. So the true news is random or unpredictable. It’s something that you didn’t know before, such as “Egypt is in crisis.” The markets will then react without delay. But since you can’t predict true news, the market is generally unpredictable. It’s not that it’s capricious; quite the contrary: It’s that it reacts to unexpected events. And if you could predict the unexpected events, you could predict the market. But since you can’t, markets are unpredictable.

    The term “random walk” was first used in the science magazine Nature. The problem presented was to try to find a drunk who was left in the middle of a field at midnight. Since you have no idea where the drunk is going to go, the question was, how would you begin the search the next morning? The answer was to begin at exactly where you left the drunk, because you can’t predict in what direction the drunk is going to go. The drunk will stagger randomly around. When you look at it, the stock market looks very much like that kind of random walk where tomorrow’s price change is pretty much unrelated to today’s price change, and it’s basically unpredictable. So the idea is that neither individuals nor professionals can predict the short-run direction of the stock market.

    CR: Since everything has become computerized, and trading firms try to get as close as they can to an exchange, do you think that the speed at which new news gets priced in has accelerated?

    BM: Yes, if anything it should make the market even more efficient. I think that you are exactly right, that this new kind of trading, where you have an advantage if you are milliseconds before somebody else is something that will make the delay even less and would cause the adjustment of markets to news to be essentially simultaneous. And when I say “simultaneous,” I mean within milliseconds.

    CR: The flip side is that—and I know you’re against technical analysis—some people try to argue that they can look at charts and identify trends and patterns.

    BM: Well, that’s exactly the point; that’s exactly the difference between the “random walk” view and the view of the so-called technical analysts who can “see” patterns. When you examine those “patterns” with sophisticated statistical analysis, you realize that they don’t exist; they’re nothing more than the runs of luck of any gambler.

    Let me give you an example. A teacher has a class write down simulated sets of numbers for random flips of a coin; in other words, to write down “Heads, tails, heads, tails, tails, heads, tails.” One student is asked to flip a real coin. And the teacher says, “Put them all on my desk after you’ve done these simulated and actual flips of a hundred coins.” Then the teacher amazes the class by determining which one was the real flip and which were the ones that were simulated. The way the teacher does it is that the real flip has many more runs of heads in a row. In other words, the real flip would tend to have “heads, heads, heads, tails, tails, tails,” whereas the students who were trying to write random ones would typically have them alternate, and you’d seldom have more than two heads in a row.

    This is the idea that within a random set of numbers, you can see patterns. But they’re not real patterns; they’re the kinds of things that you would expect in a random series. And because you can “see” a pattern from the past doesn’t mean it’s going to be repeated in the future. That’s basically the idea of those of us who believe that markets are pretty close to a random walk and believe that technical analysis or charting is not useful for investors. Quite the opposite: It makes investors trade too often, and therefore it increases their transaction costs. Furthermore, if they were successful, it means much higher taxes, because short-term capital gains are taxed at regular income tax rates, whereas long-term capital gains today carry only a 15% tax rate.

    CR: What about fundamental analysis? Do you think there’s anything in that that can help investors?

    BM: Well, most people on Wall Street are fundamental analysts, and certainly that’s how money is managed in the main. What my book has done in each edition is to say, okay, I’m skeptical that it works, let’s look at how people so-called “running money” with fundamental analysis have done. Every time I put out a new edition, and it is certainly true of the 10th edition, I ask, “this is my thesis, does it work?” Every time I do it, I find that two-thirds of active managers using fundamental analysis are beaten by a simple index fund, and those in the one-third who win in one period are not the same ones who win in the next period.

    There’s also a chart from the decade of the 2000s in the 10th edition that looks at 14 mutual fund managers using fundamental analysis who had beaten the market in every single year for nine years; the ones who clearly look like they know what they’re doing. The book shows that in the following year, only one of the 14 beat an index fund.

    Sure, you can get a lot of heads in a row when you’re flipping a coin. Sure, the reason you’ve got an average is that some people are going to be above the average. But they’re not above average all the time, and in fact, the majority of them are very much below average. The thesis that a simple index fund can be the best thing for the individual investor, I think, continues to hold.

    Now I realize that telling people that you can’t beat the market is like telling a six-year-old that Santa Claus doesn’t exist, and I think it is fine if you want to buy some individual stocks. It’s OK if you think you have spotted a trend that other people haven’t spotted and that you’ve got something that’s really going win. Do it. But at least put the core of any portfolio in low-cost index funds. And then you can try to pick individual stocks with very much less risk to the whole portfolio because its core is indexed.

    I’m very skeptical: I don’t think that you can do it, and I don’t think professionals can do it. But you want to have some fun? That’s fine. I think anyone with a gambling instinct will probably want to do a little selection on their own. But do what institutional investors now are increasingly doing: Index the core of the portfolio. And then if you want to make some bets around the edges, that’s fine, and you can do so with very much less risk.

    Source: “A Random Walk Down Wall Street,” 10th Edition, by Burton G. Malkiel (W. W. Norton & Company, 2011).

    CR: In terms of individual stocks, you talk a bit in your book about companies that can “build castles in the sky.” Can you elaborate on that a little bit?

    BM: Think to early 2000, which was really the beginning of the Internet taking over. I remember people telling me, “The retail store is a thing of the past; everything is going to be done over the Internet. It will completely transform the way we live, the way we shop, the way we learn.” You know, that’s right, but what happened was, Internet stocks got priced at over 100 times earnings. And the crash that followed was absolutely devastating for many people. Even a real company like Cisco Systems (CSCO) lost more than 90% of its value after the Internet bubble popped.

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    It’s not that the Internet wasn’t real. It was and is real—it has transformed the way we live; it has transformed the way we shop—but that doesn’t mean, as with any of these transformative technologies, that you can necessarily build the stock prices up to the sky. This may very well be happening now with cloud computing. You see a stock like Salesforce.com (CRM) selling at more than 200 times earnings. It’s not that they don’t have something that’s very important, they do. But there’s a tendency, when you have something new, for investors to pay too much for these ideas, and in general, they’ve turned out to be very, very bad investments.

    Now, again, what I say is, if you think, “No, this time, the market’s got it right. Salesforce.com’s growth process is so great that it’s worth 200 times earnings,” then fine, go out and buy it. But don’t have these kinds of stocks as your total portfolio. Don’t have a portfolio of the hot stocks, the Salesforce.coms, the Lululemons (LULU) of the present. If you want to play that game, that’s fine, but have the core of your portfolio in low-cost index funds that are very broadly diversified.

    CR: And what about individual stock-picking of small-cap value stocks? I know Ibbotson has shown higher long-term returns for both small-cap and value stocks.

    BM: I think that there is evidence that small-cap stocks have generally done a little better than large-cap stocks, and this is a big controversy within the economics profession. Some people say, “Well, that shows you the market isn’t efficient, because otherwise you couldn’t make more money by buying small-cap stocks.” The other explanation is that small-cap stocks tend to be riskier, and the idea that markets are efficient does not mean that if you take on more risk, you shouldn’t get a higher rate of return. The idea is that instead, risk and return are related, and if you take on more risk, you should get a higher rate of return. The fact that some of these patterns hold historically is not inconsistent with efficient markets and may simply reflect that risk and return are related. The second point to make on this is that while it’s true that small has generally done better than large, and “value” has done better than “growth,” it doesn’t happen every year, so it’s not a sure way of getting higher rates of return each and every year.

    CR: To go back to indexing, the one question I hear—and I’m sure you’ve heard the same thing—is that indexing didn’t work over the last decade. What is the answer to people who have the perception that indexing has failed?

    BM: This is probably the best lesson for investors in the book. The first decade of the 2000s has been called the “lost decade,” because most people lost a lot of money. They lost in index funds, they lost more if they were invested in growth funds. But if they were diversified across markets and different investments, and they rebalanced each year, I find that they could have doubled their money during the “lost decade.” This isn’t something I made up after the fact. This is using the asset allocations I have had in earlier editions of the book. The thing you needed to do was to have some bonds in the portfolio and you needed to be diversified internationally, including in emerging markets. You shouldn’t have a portfolio of simply U.S. stocks.

    In terms of the stocks, you don’t just buy the S&P 500 index. To the extent that you’re in the U.S., you buy a total stock market fund, which includes all of the small companies—something like the Wilshire 5000 index or the Russell 3000 index. And, secondly, the U.S. is only about 20% of the world economy. You don’t just buy U.S. stocks; you buy foreign stocks, and you buy emerging market stocks. It’s something I’ve emphasized in the 10th edition of the book. China is now about 10%, at official exchange rates, of the world GDP (gross domestic product), and if you make a purchasing power adjustment, it’s probably got 13% of the world’s GDP. You want to have a very strong allocation to emerging market stocks, and you want to rebalance those allocations once a year. What I show is that if you used the allocations that I’ve had in my book over the years, then even in this “lost decade,” using index funds, you doubled your money. You had to be very broadly diversified, with not only stocks but stocks and bonds, and not simply U.S. stocks, but U.S. stocks and foreign stocks, including a very strong allocation to the emerging markets of the world, which are growing much faster than the developed world.

    CR: What about gold? I know you wrote about a 5% allocation to that.

    BM: I think that’s fine. I think commodities are going to be higher in price over time, but my preference would be to do it through companies. Rather than buying gold and copper, which are two commodities that have been very strong, I would rather buy individual companies that mine these metals. I think it would make a great deal of sense to get commodity exposure through your stocks. Make sure you are sufficiently diversified so that you have some natural resource companies.

    Again, that goes back to what I said about being diversified internationally. One of the countries of the world that’s doing so well now is Brazil, because it is a country that is very rich in natural resources. Brazil has the biggest oil find in the Americas. Brazil’s got the copper and lots of agricultural land. You can access countries rich in raw materials with index funds—a Brazilian index fund, an Australian index fund. Australia is doing very well, because it is very rich in natural resources, iron ore and so forth. My own preference would then be, rather than buying the raw material or the gold bullion itself, which doesn’t pay any dividends, to get exposure through owning stocks of producers.

    CR: In terms of index investing, some people prefer equal-weighted indexes versus the market-cap-weighted index funds. Any thoughts?

    BM: You take on a little more risk with an equal-weighted index because it takes a small company and gives it the same weight as Exxon Mobil (XOM) and Apple (AAPL). It’s a way of getting a small-cap effect. I think it is something you could do; however, there are some problems with it. You have to rebalance very often and that may incur transaction costs and higher taxes. I do some rebalancing, but only once a year, so that if I do sell some of the things that have gone up to bring the allocations back to equal weight, at least I pay a long-term capital gain rather than a short-term capital gain.

    CR: Many of our members are in retirement, so they’re faced with a required minimum distribution. In terms of rebalancing, how do they factor that in?

    BM: What I always want to do is minimize transaction costs. So in a year like 2010, say, which was a good year, I would use the asset class that went up the most and take the money out of there. In other words, I’m going to get my rebalancing in the same way that I get my minimum distribution. To make a simple example, let’s say you were half stocks and half bonds, and the year is 2008. The stock market fell out of bed in 2008; the Federal Reserve had begun its program of reducing interest rates, so bonds were way up. In that kind of portfolio, you take your minimum distribution out of the bonds part. You’re taking the minimum distribution and you’re rebalancing at the same time.

    CR: Regarding bonds, if you’re indexing bonds, there’s a lot of fear about what will be happening with interest rates. Do you suggest people just index the bond portion and not worry about interest rates?

    BM: You can never predict what interest rates are going to do, any more than you can predict what the stock market will do. I suggest you have a total bond market index. I know a lot of people think interest rates are too low and the bond market is not a good place to be. It’s true that government interest rates are low, but the fact is that there are still some good risk premiums on corporate bonds and on the old Build America bonds, particularly as people now are so worried about our municipalities. A total bond market fund should be a part of the portfolio. It not only has government bonds but it also has corporate bonds, Build America bonds and so forth. Don’t think you’re going to be able to predict interest rates. It’s quite possible that the low interest rates on government agency securities and government bonds could last for a very long period of time. That’s what the Federal Reserve said at its recent meeting and has said at every previous meeting. So, yes, bonds should be part of a portfolio. Don’t try to outsmart the market and say, “No, stocks are better than bonds now” or “Bonds are better than stocks.” You cannot do that kind of timing—nobody can do it, neither individuals nor professionals.

    CR: I know you’ve talked about closed-end funds as an alternative to mutual funds. Can you comment on that?

    BM: I’m skeptical of active management. Closed-end funds are generally actively managed funds. And while I’m skeptical that they can beat the market, if you can buy a closed-end fund at a 20% discount, you are buying assets at 80 cents on the dollar. Then even if the manager can’t beat the market, you’re going to beat the market because you bought $100 worth of assets for $80. Closed-end funds, when available at attractive discounts, are even better than index funds, and I have, in the 10th edition of the book, listed a number of them. You’ve got to look and see what the discount is at the time you’re going to buy, but I’ve listed a number of them that I think can be quite attractive.

    CR: Is there anything we didn’t discuss that you think is important for investors to think about?

    BM: The book is always going to change because it’s an investment guide, and the kinds of instruments that are available to people are going to be different from year to year. One of the things that is new in the book is its focus on exchange-traded funds (ETFs). I think ETFs are a great, low-cost way to index. And there are a lot of brokers who will give you ETF trades at no commission at all. I put a lot more emphasis on ETFs in this edition. They are the fastest-growing part of the financial market, and I think for good reason.

    The final thing I would say is, I don’t think people are diversified enough internationally. As I said, China is the fastest-growing major economy in the world. It’s probably 10% or more of the world’s GDP. I know very few investors who have anything like that percentage of their portfolio in China. China, India, Brazil—these are the countries that are growing the most rapidly, and I think investors need to look at their portfolios and ask if they are diversified enough internationally. My guess is, when they look at their portfolios, the answers will be no.

    CR: Is there a guide for how much people should diversify internationally?

    BM: Obviously, it’s a little riskier to be in Chinese stocks, to be in Brazilian stocks, and it depends on your age, on your capacity to bear risk. The percentage will be different for each person. In the book I give a number of guidelines. In the model portfolio that I have, only 27% is in U.S. stocks. So that gives you some idea of where you might start. I would say in an all-equity portfolio, you certainly should not have more than half of it in the United States.

    Charles Rotblut, CFA is a vice president at AAII and editor of the AAII Journal. Follow him on Twitter at twitter.com/CharlesRAAII.
    Burton Malkiel, Ph.D. , Ph.D., is the Chemical Bank Chairman’s Professor of Economics at Princeton University. The 10th edition of his widely read investment book, “A Random Walk Down Wall Street” (W. W. Norton & Company, 2011), was recently published.


    Stephen from CA posted over 5 years ago:

    Let's hope AAII initiates much more coverage of international investing, and extends the stock screens to apply them to foreign markets.

    John from OR posted over 5 years ago:

    Very interesting.
    Perhaps I've been putting to much time into my
    portfolio. Rebalancing twice a year seems an attractive dream.
    But what % should go where? Or what are the guide lines? National GDP/World GDP?
    I guess he wants one to buy his book to learn of his suggestions.
    Has AAII tested his or some similar models?

    SM from TX posted over 5 years ago:

    I mean this means shadow stock portfolio outperforming the market is just LUCK???

    Mel from TX posted over 5 years ago:

    Malkiel makes a good case for random prices and efficient markets, however I believe Shleifer and other Behavior Finance researchers present a much more compelling arguement for inefficient markets and investor sentiment.

    As with most things, the truth probably is somewhere in between.

    Marvin from OH posted over 5 years ago:

    AAII provides a wealth of information but everytime I get close to settling on a strategy I read a new article with a conflicting perspective. How do the rest of you deal with information overload?

    Mel from TX posted over 5 years ago:

    One reason the shadow stock portfolio may perform so well is because there is not as much news or noise surrounding the smaller companies in the portfolio. No news is good news and no noise is good news. Also, smaller companies that perform may tend to trade more on the fundamentals, and, in this segment at least, companies that perform, reward.

    MORRIS from CO posted over 5 years ago:

    This author presents the same old story. He is in a corner and wrong.
    He has done this for at least 15 years. I would be more careful presenting such views. P & F charting works. Relative strength analysis works. This article is off-base in our opinion. I will confess I do not hold a graduate degree from Princeton. Neverless, I do have an MBA but
    not from an Ivy League School.

    Bill from OR posted over 5 years ago:

    Does anyone know an ETF or Mutual Fund that diversified and rebalances as described by BM? I would use this fund for my core money and then use my gambling money to bet on individual stocks.

    Larry from IL posted over 5 years ago:

    The efficient market hypothesis posits that the market prices in all news and information, which isn’t of much use when the majority of “news and information” is market hype that causes investors to “build castles in the sky.” Irrational investor behavior will continue to create extended, unpredictable departures from the mean. Conclusion: the best you can hope to do, without uncounted hours of research and analysis, and lots of luck, is to own a diversified portfolio of low-cost index funds and not gain (or lose) more than the market. This is not very comforting if the start of your retirement happens to coincide with a long period of below-average or negative returns.

    Jane from CA posted over 5 years ago:

    Surely there are better and worse times for accumulating a position in any investment--stocks vs. bonds, cap styles, U.S. vs. int'l, etc. Technical analysis should also be part an initial investment decision.

    Rebalancing is a must -- don't set and forget. Rebalancing shouldn't just be done at the end of a calendar year (when everyone else is doing it). If retirement accounts are being rebalanced, it doesn't matter the tax consequences short/long term capital gain. Better lock in your gains at some point!

    I don't trust funds that rebalance for you, as I would like to make these decisions for myself.

    Stephen from OH posted over 5 years ago:

    Charles Rotblut's interview with Burton Malkiel causes me to wonder (again) if apply Random Walk should also be applied to portfolio strategies. That is, perhaps a diversified truly portfolio should not only include Professor's Burton's portfolio approach, but also separate sub-portfolios made up of varying disciplines that might include trend, relative strength, or some other technical based strategies with each diversified among the suggested sectors. After all, the portfolio make up proposed in Professor Malkiel's book may or may not be the correct strategy over the next 10 or 20+ years if asset class correlations and relative returns veer toward previously undefined territory. Why not hedge by using two or three approaches that have shown reasonable risk adjusted returns that have low correlations? My guess would be that for most individual investors, today's liquidity, low costs, and educational resources (such as AAII) make a variety of various strategies sensible alternatives to using one methodology that relies primarily on periodic rebalancing into asset classes that may or may not perform in a manner that is consistent with their historical risk, returns, and correlations.

    R E from GA posted over 5 years ago:

    There are two sides to this intellectual debate: Dr. Malkiel's and that of Andrew Lo & Craig McKinley, who documented anomalies that seem to prove Dr. Malkiel wrong, in their book, A Non-Random walk Down Wall Street (about 10 yrs ago.

    It also ignore the findings of the pioneers in Behavorial Finance who have documented that the reaction times to news in the market varies greatly amongst investors. This finding has oft been cited as the reason for the "Value" Anomaly" used by Warren Buffett, and the "Momentum Anomaly" used by William O'Neill.

    The interview is thus incomplete for now...

    Herschel from NJ posted over 5 years ago:

    I once read that "streaks" don't exist in basketball. That is, regardless of how many baskets are made in a row, the probability of a player making the next basket is still the same as their long term percentage. Just like the coin flipping, but anyone who ever watched basketball would swear players get hot or go cold. So what is the truth? Watch the ncaa tourney.

    If stock prices were a 'random walk' then they would be subject to variance analysis. That is, when a stock price moves (randomly) two sigma below its moving average, without change in fundamentals, then the stock should rise. (This is not pure or just reversion to mean) I have found that "good" stocks trading at low price and low volumne to their means do better than "the market".

    Harry from FL posted over 5 years ago:

    Thanks for the article.

    At any casino, crowds gather around a player on a hot streak. If s/he quits before the streak ends, s/he leaves to applause, and possibly offers of compensation for revealing the "secret."

    If s/he continues against the house to the end, all is ultimately lost. Unless, of course, the house goes broke, and everyone settles for the status quo.

    The alternative for sensible investors managing their own money and not blessed with the gift of prophecy, is buying the market ala Jack Bogle.

    bkpark from CA posted over 5 years ago:

    "AAII provides a wealth of information but everytime I get close to settling on a strategy I read a new article with a conflicting perspective. How do the rest of you deal with information overload?"

    It's typical of economists; they usually don't even agree with themselves. As the saying goes, if you ask 10 economists for their opinion on something, you'll get 20 different answers.

    I usually go with the one I find more convincing, and learn to ignore the ones I don't (i.e. tune out the noise).

    FWIW, I don't find the professor's view here terribly convincing: what he's actually arguing is for some sort of *perfect* efficiency of the markets (you never get perfect efficiency in real world), and if what he was arguing were true, many people on Wall St. won't have a job (at least if people were rational---BTW, if people weren't perfectly rational, there's no reason for market (which is composed of people) to be perfectly rational).

    Since the latter is clearly not true and former isn't all that convincing (yes, market is probably efficient, but does it have to be 100% efficient? Isn't it possible it only gets the correct pricing somewhere within 5% of true value and fluctuates around that depending on how people feel?), I find his view not all that convincing.

    James from VA posted over 5 years ago:

    How do index funds make stock prices more predictable?

    Percy from IL posted over 4 years ago:

    If Malkiel is right how come emperical research shows that a trend following strategy using anything between a 2 day and a 300 day simple moving average crossover of the Dow Jones/ S&P500 indices has beaten these indices over the last 100 years? Even the strongest proponent of buy and hold - Prof Jeremy Siegel in his book Stocks for the Long Term - admitted this was true when he tested a 200 day moving average crossover strategy between 1875 and 2005. If he had included the bear market of 2007-09, the results would have supported a trend-trading approach even more convincingly. Professional market timers like www.markettimimg.com.au uses both trend and momentum measures to reduce downside market risk while also beating a buy and hold approach to holding a market index linked exchange traded fund (ETF).

    PG from NY posted over 4 years ago:

    Let's get something straight here: Nobody, and I do mean NOBODY, can persistently beat their benchmark index over the long haul after factoring in commissions, fees, and taxes. I have read every investment book I can get my hands on, including academic studies and research papers. If you think it can be done you're like the person who thinks psychics can find missing persons, or that dowsers can find underground water. They might get lucky once in a while, but over time their success rate will match pure chance from a statistical standpoint. If you want to do better than 99% of all investors AND get a good night's sleep, split up your portfolio among several broad-market low-cost index funds so that you own every segment of the market, and then rebalance whenever any fund drifts more than 20% from the target allocation (i.e. when a 10% stake shifts to below 8% or above 12%). You'll thank me later, trust me.

    David from IA posted over 4 years ago:

    Also, using the statistics at reference http://www.aaii.com/stock-screens/performance AND http://www.aaii.com/stock-screens/riskreturn , I would recommend only the S&P MidCap 400 Growth.

    I believe that one should get out or trim back by 50% on index funds when the ^VIX is > 32 and definitely in an uptrend. Re-entry should be when the uptrend is definitely reversed. To prove this, one can use, say, Yahoo Finance to compare the graphs of ^VIX and ^GSPC.

    Paul from NY posted over 4 years ago:

    I guess if I wrote a book I would want to defend the premise.

    Like the economists like to talk about the Great Moderation... they had everything figured out on how to manage the economy.

    How about everything is price in... if this professor is from Princeton he should walk over to Daniel Kahneman's office and get an education.

    We can time the market, and we can use charts to tell us when to get into and out of ETFs and rebalancing is critical.

    Also we can use options to increase our rate of return..

    In 2011 we beat the S&P by 25 times over.

    Please don't listen to the people who want you to think you are helpless.

    Why they want you to use financial planners when with computers, charting packages, real time info, ETFs, a bull and bear indicator, and options and EDUCATION... you can do better.

    Otherwise go get another copy of the professor's book.

    Jon F. from OH posted over 4 years ago:

    I fully agree with David's comments above.

    This opinion is a generalization based on slanted research. John Neff maintains the same views. The random numbers example with children is "cute" but is also worthless. The key with interpreting charts in technical analysis is not looking for the chart to give you the buy vs sell answer, but instead to understand what the indicators are telling you about market movements, especially those due to accumulation and distribution which lead to the "cycles" through which securities move.

    An astute individual not only CAN time the market but can outperform many so called investment advisors. I don't say that everyone can do this but with proper study, instruction from experienced traders including continued performance review, individual investors can time the market or individual stocks and ETF's. A trader has to learn to control their emotions, the biggest hurtle for individual investors, and maintain accurate trading records, which should be reviewed on a regular basis. This internal QC will provide a "continuing education" program to constantly assess and improve one's performance. Lastly, strict money management skills are mandatory.

    Plus, many individual investors - I would suspect the majority of AAII members - are not "traders" but rather "investors" using their study & interpretation of fundamental analysis to choose their stocks with a longer time horizon than technical traders.

    The key is the individual must be willing to take on the RESPONSIBILITY of managing at least a portion of their portfolio. Quite possibly the majority of folks don't want to do this which will provide many customers for the traditional investment management companies.

    James Fretty from WI posted over 4 years ago:

    Assume an experienced investor who invests in individual securities. He or she may be able to outperform the indeces. However, it may be a full time job to screen and investigate, and then prioritize and make diversified buy decisions, and then monitor the portfolio, and then make sell decisions, for a portfolio of stock and bond securities of say a minimum of 30 to 40 companies. Not to mention newsletter study (and cost). And be sure to toss in a bunch of foreign securities. I'm retired and have available time, but I'd rather play tennis, travel, etc. I can sleep fine if I mostly stick to studying and buying a "good enough", longer term mix of a dozen index funds and ETFs with periodic rebalancing, and otherwise avoid the buy and sell labor of individual companies. I do think that smart small and micro stock investing can beat the Wilshire 5000, and can be accomplished with minimum work in AAII shadow stock investing of a portion of my U.S. stock portfolio. (By the way, even though in theory I'd rather buy individual bonds, I'm mostly out of my depth and I leave that to indexing and long-time experts in active funds.)

    Jim of Milwaukee

    H Stringer from TX posted over 4 years ago:

    I you want to beat the odds use Warren Buffett's techniques. They have been proven to work.

    Dave K. from CA posted over 4 years ago:

    I resonate with Jon's perspective posted yesterday. I too enjoy tennis and travel more than investment and market research. Consequently, the core of my retirement portfolio is invested in 3 bond mutual funds and about 10 ETF (mostly foreign equity) index funds. I rebalance whenever I add new money or make a charitable gift of an appreciated asset (perhaps twice a year). That way, the time needed for investment management is minimal, and doesn't crowd out other life purposes and interests. For a good article on how to construct a "Gone Fishing" portfolio, check out http://www.emarotta.com/relax-with-a-gone-fishing-portfolio/

    James Jennings from VA posted over 4 years ago:

    I draw three conclusions from Professor Malkiel's comments:

    a) statistics, classical, and all other variations, are nonsense. Every securities price sits rock solid on its mean, and never wavers from it; everyone has instantaneous access to news, immediately and correctly evaluates its effect on prices, is 100% rational and emotionless, and instantaneously acts appropriately;

    b) Mr. Malkiel has never looked at a stock chart, and knows absolutely nothing about technical analysis or its purpose and objectives, and

    c) I am wasting my money subscribing to AAII.

    Charles Salvatori from IL posted over 4 years ago:

    there is no such think as investment..Everything is speculation.Buy meaningful chunks of the security you like and sit on it like the hen with eggs and being in the poultry business not all the eggs are fertile.The guys that get truly rich in this game were/are great poker players.They never wait for the hot streak to end.Every hot streak for me had been a sweat as to what to buy,when to buy,sweat the first weeks in and sweat as to when to get out.

    Craig Shoemake from MA posted about 1 year ago:

    I think it's time someone put Burton Malkiel out of his misery. I don't mean kill him, of course. I'm sure he's a wonderful man. But the message he's spouting is shear nonsense, and has been invalidated by reams of data for decades. The highly touted "efficiency" of the markets is a myth propagated by academics primarily to the benefit of their careers and paper citations. It exists only over the very long haul, and then only in fits and starts. Where, pray tell, was the market's efficiency in 2000 and 2007 before the two biggest bubbles since the 1920s burst? I could go on. If you put your money into an index fund you will get market returns, and you will suffer the market's insanity. Why not buy companies that have been inefficiently and irrationally made cheap by the idiocy of these so-called efficient markets? If you do, you will prosper, like so many other sensible value investors.

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