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A Random Walk Down Wall Street by Burton G. Malkiel

A Random Walk Down Wall Street by Burton G. Malkiel

by Parker · 48 things on Twos

The Time-Tested Strategy for Successful Investing
Investors would be far better off buying and holding an index fund than attempting to buy and sell individual securities or actively managed mutual funds.
“What is a cynic? A man who knows the price of everything, and the value of nothing.” - Oscar Wilde
The intrinsic value of a stock was equal to the present (or discounted) value of all its future dividends. Investors were advised to “discount” the value of moneys received later.
A thing is worth only what someone else will pay for it.
No one person or institution consistently knows more than the market.
A useful rule, called "the rule of 72," provides a shortcut way to determine how long it takes for money to double. Take the interest rate you earn and divide it into the number 72, and you get the number of years it will take to double your money.
Rule 1: A rational investor should be willing to pay a higher price for a share the larger the growth rate of dividends and earnings.
Corollary to Rule 1: A rational investor should be willing to pay a higher price for a share the longer an extraordinary growth rate is expected to last.
It is the P/E multiple, not the price, that really tells you how a stock is valued in the market.
Rule 2: 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.
Rule 3: A rational (and risk-averse) investor should pay a higher price for a share, other things equal, the less risky the company's stock.
Rule 4: A rational investor should pay a higher price for a share, other things equal, the lower the interest rates.
Caveat 1: Expectations about the future cannot be proven in the present.
Caveat 2: Precise figures cannot be calculated from undetermined data.
Caveat 3: What's growth for the goose is not always growth for the gander.
Rule 1: Buy only companies that are expected to have above-average earnings growth for five or more years.
Rule 2: Never pay more for a stock than its firm foundation of value.
Look for growth situations with low price-earnings mul-tiples. If the growth takes place, there's often a double bonus-both the earnings and the multiple rise, producing large gains. Beware of very high multiple stocks in which future growth is already discounted. If growth doesn't materialize, losses are doubly heavy-both the earnings and the multiples drop.
Rule 3: Look for stocks whose stories of anticipated growth are of the kind on which investors can build castles in the air.
The probability of making a shot is independent of the outcome of previous shots.
Simply buying and holding a diversified portfolio suited to your objectives will enable you to save on investment expense, brokerage charges, and taxes.
One of the most important lessons of behavioral finance is that individual investors must avoid being carried away by herd behavior.
A dollar loss is 2½ times as painful as a dollar gain is pleasurable.
Anything that seems too good to be true undoubtedly is untrue.
The core of every investment portfolio should consist of low-cost, tax-efficient, broad-based index funds.
The harsh truth is that the most important driver in the growth of your assets is how much you save, and saving requires discipline.
The single most important thing you can do to achieve financial security is to begin a regular savings program and to start it as early as possible.
It is critically important to start saving now. Every year you put off investing makes your ultimate retirement goals more difficult to achieve. Trust in time rather than in timing.
The secret of getting rich slowly (but surely) is the miracle of compound interest. Albert Einstein described compound interest as the "greatest mathematical discovery of all time." It may sound complicated, but it simply involves earning a return not only on your original investment but also on the accumulated interest that you reinvest.
Remember Murphy's Law: What can go wrong will go wrong.
Murphy was an optimist. Bad things do happen to good people. Life is a risky proposition, and unexpected financial needs occur in everyone's lifetime.
For individuals, home and auto insurance are a must. So is health and disability insur-ance. Life insurance to protect one's family from the death of the breadwinner(s) is also a necessity. You don't need life insurance if you are single with no dependents. But if you have a family with young children who count on your income, you do need life insurance and lots of it.
My advice is to buy renewable term insur-ance; you can keep renewing your policy without the need for a physical examination. So-called decreasing term insurance, renewable for progressively lower amounts, should suit many families best, because as time passes (and the children and family resources grow), the need for protection usually diminishes. You should understand, however, that term-insurance premiums escalate sharply when you reach the age of sixty or seventy or higher. If you still need insurance at that point, you will find that term insurance has become prohibitively expensive. But the major risk at that point is not premature death; it is that you will live too long and outlive your assets. You can increase those assets more effectively by buying term insurance and investing the money you save yourself.
Do not buy insurance from any company with an A.M. Best rating of less than A. A lower premium will not compensate you for taking any risk that your insurance company will get into financial difficulty and be unable to pay its claims. Don't bet your life on a poorly capitalized insurance carrier.
In principle, for the buyer who holds his or her stocks forever, a share of common stock is worth the "present" or "discounted" value of its stream of future dividends.
Long-run equity return = Initial dividend yield + growth rate.
When interest rates rise, bond prices fall so as to make existing bonds competitive with those that are currently being issued at the higher interest rates. When rates fall, bond prices increase. The principle to keep in mind is that bond investors who don't hold to maturity will suffer to the extent that interest rates rise and gain to the extent that rates fall.
The Standard & Poor's 500-Stock Index, a composite that represents about three-quar-ters of the value of all U.S.-traded common stocks, beats most of the experts over the long pull.
Taxes are a crucially important financial consideration because the earlier realization of capital gains will substantially reduce net returns. Index funds do not trade from security to security and, thus, tend to avoid capital gains taxes.
Rule 1 : Confine stock purchases to companies that appear able to sustain above-average earnings growth for at least five years.
Rule 2: Never pay more for a stock than can reasonably be justified by a firm foundation of value.
Buy stocks whose P/Es are low relative to their growth prospects.
Rule 3 : It helps to buy stocks with the kinds of stories of anticipated growth on which investors can build castles in the air.
Rule 4: Trade as little as possible.
There is no consistent long-run relationship between performance in one period and investment results in the next.
There is no way to beat the market consistently by purchasing the mutual funds that have performed best in the past.
Never buy actively managed funds with expense ratios above 50 basis points (½ of 1 percent) and with turnover of more than 50 percent.