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1 Document [10/7/2007 12:41:52 Skype: 3A random walk down Wall StreetIncluding A Life-Cycle Guide To Personal InvestingBurton G. Malkiel Chemical Bank Chairman's Professor of Economics At Princeton University [10/7/2007 12:41:53 Skype: 4 Copyright 1999, 1996, 1990, 1985, 1981, 1975, 1973 by W. W. Norton & Company, rights reserved Printed in the United States of AmericaThe text of this book is composed in Zapf Elliptical with the display set in Berling. Desktop composition by Justine Burkat Trubey Manufacturing by the Haddon Craftsmen, of Congress Cataloging-in-Publication Data Malkiel, Burton G.]]

2 A random walk down Wall Street : including a life-cycle guide to personal investing / Burton G. Malkiel. p. cm. Rev. ed. of: a random walk down Wall Street. c1996. Includes bibliographical references and index. ISBN 0-393-04781-4 1. Investments. 2. Stocks. 3. random walks (Mathematics) I. Malkiel, Burton G. random walk down Wall Street. II. Title. HG4521 .M284 1999 dc21 98-50671 CIPW. W. Norton & Company, Inc., 500 Fifth Avenue, New York, 10110 W. Norton & Company Ltd.

3 , 10 Coptic Street, London WC1A 1PU2 3 4 5 6 7 8 9 0 [10/7/2007 12:41:53 Skype: 5To Nancy [10/7/2007 12:41:54 Skype: 7 CONTENTSP reface13 Acknowledgments from Earlier Editions 17 Part One Stocks and Their Value 1. Firm Foundations and Castles in the Air 23 What Is a random walk ? 24 Investing as a Way of Life Today 26 Investing in Theory 28 The Firm-Foundation Theory 29 The Castle-in-the-Air Theory31 How the random walk Is to Be Conducted 332. The Madness of Crowds 35 The Tulip-Bulb Craze (1 of 3) [10/7/2007 12:41:54 Skype: South Sea Bubble 39 The Florida Real Estate Craze 45 Wall Street Lays an Egg 46An Afterword 533.]]]

4 Stock Valuation from the Sixties through the Nineties 55 The Sanity of Institutions 55 The Soaring Sixties 57 The New "New Era": The Growth-Stock/New-Issue Craze 57 Synergy Generates Energy: The Conglomerate Boom 61 Performance Comes to the Market: The Bubble in Concept Stocks 69 The Sour Seventies 73 The Nifty Fifty 73 The Roaring Eighties (2 of 3) [10/7/2007 12:41:54 Skype: Triumphant Return of New Issues 76 Concepts Conquer Again: The Biotechnology Bubble 78 (3 of 3) [10/7/2007 12:41:54 Skype: 8 The Chinese Romance with the Lycoris Plant80 Some Other Bubbles of the 1980s 81 What Does It All Mean?]]

5 85 The Nervy Nineties 85 The Japanese Yen for Land and Stocks 85 The Internet Craze of the Late 1990s 90A Final Word 944. The Firm-Foundation Theory of Stock Prices 95 The "Fundamental" Determinants of Stock Prices 96 Two Important Caveats 103 Testing the Rules 106 One More Caveat 108 What's Left of the Firm Foundation? (1 of 3) [10/7/2007 12:41:55 Skype: Two How the Pros Play the Biggest Game in Town 5. Technical and Fundamental Analysis 117 Technical versus Fundamental Analysis 118 What Can Charts Tell You?]

6 119 The Rationale for the Charting Method 124 Why Might Charting Fail to Work? 126 From Chartist to Technician 127 The Technique of Fundamental Analysis 128 Why Might Fundamental Analysis Fail to Work? 132 Using Fundamental and Technical Analysis Together 1346. Technical Analysis and the random - walk Theory 138 Holes in Their Shoes and Ambiguity in Their Forecasts 138Is There Momentum in the Stock Market? (2 of 3) [10/7/2007 12:41:55 Skype: What Exactly Is a random walk ? 142 Some More Elaborate Technical Systems 145 The Filter System 146 The Dow Theory 146 The Relative-Strength System 147 Price-Volume Systems 148 Reading Chart Patterns 148 Randomness Is Hard to Accept 149A Gaggle of Other Technical Theories to Help You Lose Money 150 (3 of 3) [10/7/2007 12:41:55 Skype: 9 The Hemline Indicator151 The Super Bowl Indicator153 The Odd-Lot Theory153A Few More Systems155 Technical Market Gurus155 Why Are Technicians Still Hired?]]

7 159 Appraising the Counterattack160 Implications for Investors1637. How Good Is Fundamental Analysis?165 The Views from Wall Street and Academia166 Are Security Analysts Fundamentally Clairvoyant?166 Why the Crystal Ball Is Clouded1701. The Influence of random Events1712. The Creation of Dubious Reported Earnings through "Creative" Accounting Procedures1723. The Basic Incompetence of Many of the Analysts Themselves1744. The Loss of the Best Analysts to the Sales Desk or to Portfolio (1 of 2) [10/7/2007 12:41:56 Skype: Security Analysts Pick Winners?]

8 The Performance of the Mutual Funds178 Can Any Fundamental System Pick Winners?186 The Verdict on Market Timing187 The Semi-strong and Strong Forms of the random - walk Theory190 The Middle of the Road: A Personal Viewpoint 193 Part Three The New Investment Technology 8. A New Walking Shoe: Modern Portfolio Theory199 The Role of Risk200 Defining Risk: The Dispersion of Returns201 Exhibit201 Expected Return and Variance: Measures of Reward and Risk201 Documenting Risk: A Long-Run Study204 Reducing Risk: Modern Portfolio Theory (MPT)206 Diversification in Practice2119.

9 Reaping Reward by Increasing Risk220 Beta and Systematic Risk221 (2 of 2) [10/7/2007 12:41:56 Skype: 10 The Capital-Asset Pricing Model (CAPM)224 Let's Look at the Record 229An Appraisal of the Evidence 232 The Quant Quest for Better Measures of Risk: Arbitrage Pricing Theory 234A Summing Up 23710. The Assault on the random - walk Theory: Is the Market Predictable after All? 240 Predictable Patterns in the Behavior of Stock Prices 2421. Stocks Do Sometimes Get on One-Way Streets2432. But Eventually Stock Prices Do Change Direction and Hence Stockholder Returns Tend to Reverse Themselves2443.]

10 Stocks Are Subject to Seasonal Moodiness, Especially at the Beginning of the Year and the End of the Week247 Predictable Relationships between Certain "Fundamental" Variables and Future Stock Prices 2491. Smaller Is Often Better2492. Stocks with Low Price-Earnings Multiples Outperform Those with High (1 of 3) [10/7/2007 12:41:56 Skype: Stocks that Sell at Low Multiples of Their Book Values Tend to Produce Higher Subsequent Returns2534. Higher Initial Dividends and Lower Price-Earnings Multiples Have Meant Higher Subsequent Returns2545.]