Jonathan Burton’s Life Savings: Stocks are still ‘the best game in town’ to beat inflation. The guru of index investing explains why.

by | Mar 8, 2023 | Stock Market

“ ‘Indexing is not a mediocre strategy. It is an above-average strategy.’”

In January 1973, an investment book was published that would help change Wall Street forever. Burton Malkiel’s “A Random Walk Down Wall Street” made the then-heretical assertion that professional money managers weren’t worth their fees. Malkiel put it bluntly, stating that, “a blindfolded chimpanzee with a dart and a list of stocks” could beat Wall Street pros at their own game. Beating the market is difficult, Malkiel explained, because the market digests all available information through what’s known as the efficient-market hypothesis. Malkiel argued that stock prices follow a “random walk” and their fluctuations cannot be predicted.

Since most stock-pickers cannot consistently beat a benchmark index such as the large-cap S&P 500
Malkiel, at the time a professor of economics at Princeton University, argued that investors are better off buying and holding the benchmark itself, settling for a return equal to the average. In this way, you’ll do better than active management, at a lower cost and with greater certainty. Malkiel’s assertion was met with skepticism if not outright derison. In 1973 there was no low-cost index mutual fund available to retail investors. Malkiel advocated for the creation of such a product, but when John Bogle, founder of the Vanguard Group, introduced one three years later, the money initially stayed away. Half a century later, however, low-cost index mutual funds and exchange-traded funds are cornerstones of many investment portfolios. “A Random Walk” has become a classic must-read for investors, and just marked its 50th anniversary with another in a series of revised and updated editions. In this recent telephone interview, which has been edited for length and clarity, Malkiel discussed the book’s longevity and its relevance to the current stock-market environment. MarketWatch: Half a century after its publication, “A Random Walk Down Wall Street” is still t …

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