Scott Puritz: Burt, in Random Walk, you talk quite extensively about the irrational exuberance of individual behavior. Could you elaborate?

Burt Malkiel: Well, that expression was actually coined by Alan Greenspan. And Mitch had asked me about bubbles and ups and downs and those of you who are old enough to have been in the market for decades knows that in the late 1990s into the beginning of the new millennium, we had what was referred to as bubble. Anything that in its name or anything that had anything to do with the internet sold at ridiculous prices. Cisco systems sold at, they made the backbone, the switches, the backbone of the internet sold at over a hundred times earnings. Amazon was over a hundred times earnings, Microsoft was over a hundred times earnings and this was the kind of bubble that particularly those people who thought, “I don’t want to be in an index fund, I just want to go and buy these particular stocks that are going up.”

And a lot of people say then, “Well, that’s why you want active management.” Actually, the active managers have piled into those stocks. So, maybe what you ought to do is recognize these things and then realize that you’ll stay out of the market during those periods. And this goes back to the term irrational exuberance, Alan Greenspan had it picked. He thought there was an internet bubble and he gave this speech saying that the market could very well be irrationally exuberant. But let me tell you what the problem was, the problem was that he made that speech in 1996. And if you had bought a day after he had made that speech, you did brilliantly. Yes, there are bubbles, yes, there are these tremendous fluctuations, sure, it would be great if we were all patient and we knew how to avoid them, we don’t. And the people who then tried to time this were just dead wrong and they couldn’t do it.

As much as it’ll hurt to be in the market in those periods, you’ll never know how much the bubble’s going to inflate. You’ll never know when it’s going to pop, it didn’t pop till four years later after his speech. And the same sort of thing recently, we had a year ago, a bubble in so-called meme stocks. We had a stock called GameStop that was selling games out of stores at a time when all the games were being distributed online. The company was losing money but an internet mob decided this was a great thing to buy, and the stock doubled and then doubled again and doubled again. And everyone thought, “Well, look, this is the way to get rich.”

Sure, it’d be wonderful then, let’s go and sell this short and then we’ll make money. Well, one of the hedge funds, Melvin Capital tried to do that and they thought it was absolutely crazy and they went bankrupt trying to sell that particular company short. So, look, you got to understand in this game what you can know and what you can never know. It would be wonderful if we knew when things were too high and too low. It would be wonderful if we could identify all bubbles in advance and we know just when they’re going to pop, we can’t do it. Just be consistent and accumulators who are accumulating over time will do extremely well, despite the fact that sometimes they’re going to be holding stocks when the stocks fall sharply.

That sometimes you’re going to have a 2022 when you’ve lost money in the stock market, realize that that’s part of what you have to accept to get the good long run rates of return from the stock market. I would say never bet against the long run growth of the United States of America. Don’t try to time just invest consistently and when you are fortunate enough to then be retired with a big nest egg, then shift to a somewhat safer income-oriented portfolio that is appropriate to your age. And it’s not rocket science but it’s the right thing to do and it’s the effective thing to do. And what pleases me the most about my random mock book are the letters that I get from readers who say, “You know, I followed the advice that you gave to the letter.

Sometimes I was scared to death like when the internet bubble popped but I kept with it. I’ve never made a lot of money in my life, but I’m now enjoying a comfortable retirement invested in a much safer portfolio, thank you.” And nothing pleases me more than to be able to do things that really have helped people get a comfortable retirement.

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