Book Summary: A Random Walk Down Wall Street

Sylvia X
4 min readApr 7, 2021

Finally decided to spend more time on managing my savings and investment. As someone with very little investment knowledge, reading some classics is a good start. A Random Walk Down Wall Street has been recommended by many as a must-read for newbies in personal investment. The book was first published in 1973 and has been re-published for 12 times (the latest version I read included opinions on Bitcoin).

A Random Walk Down Wall Street by Burton G. Malkiel — Edition 12

The book is for individuals who want to have enough money for their retirement — not for active trading and short-term return. It introduced basic concepts people apply in investment. What I really like is that the author analyzed the pros of cons of methods professionals use with solid proofs of years of data. He shared, iterated and re-iterated his points of view and principles that individual investors should follow throughout the book. The book is also quite practical in the sense that the author provided portfolio setup for individuals in different lifecycles and step-by-step guidance, even with a list of mutual funds and ETFs end of the book — readers should be able to find the right investment approaches for themselves and know exactly how and where to start after finishing the book.

Here, I want to summarize the key principles that the author stand for, as reminders for myself and as references for people who are interested in the book but yet find time to finish it. However, you should read through the book if you are curious about the rationale behind.

Save early, but never too late

You should have regular savings, so you have the basis for investment and benefit from the power of compounding. The book mentioned “4 percent solution”, meaning to spend no more than 4 percent of the total value of your income annually. To be more accurate, you should take inflation into consideration. You can then calculate the amount you need for years of retirement and that would be your saving and investment target.

Know your risk tolerance level & diversify

Whatever portfolio of investment you choose, it is important to know your sleeping point. If the current portfolio keeps you awake at night, you should decrease the amount of the risky ones.

Different people at different ages and life situations have different level of risk tolerance. For individuals in mid-twenties, the author suggested 70% of stock, 15% of bonds, 10% of real estate (portfolio of REITs) and 5% of cash. When you grow older, the percentage of bonds and real estate should increase and of stocks decreases.

Investors can diversify the risk by investing in different markets and assets.

Avoid irrational market behaviors

The book introduce the 4 irrational market behaviors in behavioral finance that every investor can easily fall into.

Overconfidence: we easily attribute good outcomes to our own ability, but rationalize bad outcomes as a result of unusual external events.

Biased judgements: investors tend to have the illusion of control that they can predict stock future prices. When we make a judgement or assessment, we can easily forget the probability of the outcome. If we always consider base rates from mass population for a certain event to happen, i.e. being a winner in stock market, we realize the probability is pretty low.

Herding: according to experiments, what other people said could actually change what you believed you saw. Investors need to avoid being carried away by herd behavior.

Loss aversion: people tend to be more risk seeking when they face sure losses.

(Bonus one) Pride and regret: people are more reluctant to sell stocks in loss and prefer to hold and wait and hope the prices get back up. However, selling stock in losses can help reduce tax on other realized gains or tax reduction.

Choose sustainable growth

It doesn’t matter how fast your stocks will grow, but how long the return can sustain. Corporations have lifecycles as well. There is evidence that the returns are higher with companies of lower price-book ratios and smaller sizes.

New issues should be avoided, as the initial prices are usually hyped up. Their investors also have a 6-month “locked-up” period. Therefore, the price could drop quickly after 6 months.

Have Index as core of your portfolio

Index provided investors with an average annual rate of return of around 10% annually over the past 90 years and none of the technical scheme analysis has realized that return. Therefore, the author advocates stock-market indexes as the core of an investor portfolio. It is very rare for an individual to beat the market.

Hold for long-term

The author strongly stand that individuals, including fund managers, can’t beat the market. He provided the fund performances over the years to prove that. Active trading is also not worth it, after including tax and transaction fees. An investor better buys and hold.

No one person or institution consistently knows more than the market.

Rebalance annually

Rebalancing helps investors diverse the risk and make sure that the portfolio reflects your risk tolerance you chose. Again, try to sell the ones in losses for tax benefits.