Professor Burton Malkiel describes the inspiration for writing his best-seller, A Random Walk Down Wall Street, 50 years ago.
Scott Puritz: Burt, Mitch and I really want to thank you for joining us this afternoon. Your book, A Random Walk Down Wall Street, has now been out there for 50 years. It’s sold over 2 million copies, it’s a sensation and we really look forward to talking about the book and all the thinking behind it. The first question that I would love to toss your way, Burt, is what was the inspiration for the book?
Burt Malkiel: Well, the inspiration was that I’m a skeptical guy. I had started my career working for one of the major investment firms on Wall Street. And I had noticed that recommendations were made about individual stocks. Since this was a big firm, the stock price would go up when the recommendation was published but then the price would fall back to where it was before. I talked to investment managers who were absolutely convinced that they could outperform the market. And I would look at the performance and then look at the market performance and I began to think, does the emperor really have clothes?
And as I say, being a skeptical guy, I decided maybe the emperor didn’t have clothes. And when I had left Wall Street to enter academic life, I actually did a lot of statistical work myself and it suggested to me that my worry about the emperor’s clothes was really, really quite correct. That when you looked at the data, it just wasn’t clear that people could pick individual stocks. It wasn’t clear that investment managers could select portfolios that would do better than the market and I knew they were charging large amounts of money to do it. And I thought, “Gee, what we really need is a low-cost fund that simply bought and held all the stocks in the market, i e an index fund.”
And when I said this in the first edition of the book, people said quite correctly, “Yeah, but you can’t buy the market.” And in that first edition, I said, “Okay, well I think it’s about time that you could.” And then three years later, Jack Bogle actually introduced what was called the first index fund. Its reception wasn’t any better than the reception for the book, the skepticism throughout Wall Street, who wants mediocrity? But again, as the evidence piled up, both Jack and I realized that in fact buying and holding a low-cost index fund was in fact the correct investment advice.