Reddit reviews A Random Walk Down Wall Street: The Best and Latest Investment Advice Money Can Buy (Sixth Edition)

For others interested, a good book that details this sort of argument is A Random Walk Down Wallstreet.

I do have a question for you, though, cdigiola. How can index funds be so efficient without Wall St vigorously researching and trading the underlying stocks? It makes sense to only hold index funds (I do), but it doesn't seem like an equilibrium solution. If everyone did that, they wouldn't work anymore, right?

Read A Random Walk Down Wall Street. Some good points, pasted from an Amazon review:

• "A simple 'buy-and-hold' strategy typically makes as much or more money than technical strategies" (p 151).
  
  
• "No technical scheme whatever could work for any length of time and ...even if they did work, the schemes would be bound to destroy themselves" (p 167).
  
  
• Regularities in stock market movements are arbitraged away over time; whoever spots such a regularity would not tell everyone else, but instead would keep it to him- or herself to get rich (p 168).
  
  
• Many analysts are incompetent or are compromised by institutional conflicts of interest (pp 181, 183).
  
  
• "The evidence from several studies is remarkably uniform. Investors have done no better with the average mutual fund than they could have done by purchasing and holding an unmanaged broad stock index" (p 187).
  
  
• The only market-timing strategy that makes any empirical sense is to purchase stocks that have had relatively poor recent performance (p 257).
  
  
• The stock market goes through manias but is fundamentally logical (p 258).
  
  Here's a fun analogy: Trying to play the stock market as an amateur is like trying to beat the entire NBA in a basketball game, as an amateur.
  
  If you really insist on playing with the market, then limit to 5% of your portfolio, or less. At least then you can't do much damage. Hubris is a stupid reason to lose your retirement savings.

This.

Fact of the matter is that— in general— it appears to be impossible for regular investments to outperform the market at large. Sure, sometimes bets pay off. But if you're betting you're a gambler, not an investor.

There is a fun scam which is pretty informative: Take a list of 100,000 possible investors. Fax them all a recommendation for a randomly selected stock. Next week, throw away all the names where you random recommendation turned out bad, maybe 10% of them. After months of this you'll have a list of a few hundred people who think you're a stock god. Now ask them to invest in whatever crazy thing will be profitable for you personally or you offer to sell them your next great pick at a high price. Score.

The system of investments enjoys the same kind of "winners bias"— when you look at the past performance of a stock or mutual fund did it perform better because it was somehow better or just because it happened to be the winner in the random chance lottery?

It turns out that in investment markets the latter is the dominant influence. It's like the scam, but instead there are lots of funds and the investors look at the list of "top performers" and give them money. There isn't a single scammer making it rich, but you lose just the same.

You can't reliably out-perform the market (see A Random Walk Down Wall Street) within the market. You can, however, under-perform the market and a great many mutual funds do. Worse, with a high overhead investment even when you don't lose— you lose.

Lets say the long market average performance is 8%. You invest in a mutual fund with 1.8% overhead (overhead on some random "Top performer" mutual fund that came up in a google search for me) and it happens to do about as well as the market:
$10,000 (1+.08-.018)^30 = $60,776
If you compare that to a low overhead ETF:
$10,000 (1+.08-0.0007)^30 = $98,688

Even when they do as well as the market an aggressively managed fund will cost you $37,912 and this scales linearly with your investments (e.g. on $100k invested you'll lose $379,117). Plus, they're likely to do worse than the market in the long run. The overhead is only justified if they can do better, but thats not a reasonable expectation.

So sure, you can have a lot of fun pouring a lot of attention into picking some brilliant-crazy investments and it might pay off. But this is gambling— it may be safer gambling than the craps table, but it's still gambling the game is just a little less obviously fixed. If you're going to engage in it at least you shouldn't lie to yourself. If you do, you're no less a fool that the idiots who think they're going to make it rich on some crazy roulette scheme.

In any case, investing is one of the areas which are especially amiable to a strictly rationalist "shut up and multiply" solution— figure out the expected returns on each of your options and pick the one with the best expected return. Not the one with the highest but infinitesimally likely pay-off. The best overall expected return. And in terms of overall expectations, high overheads make many options obvious losers.

[Edit: Fixed my calculations]

These are investing and trading books I'd read. Even if you don't believe their strategy, others do, and that makes them important to read.

http://www.amazon.com/Reminiscences-Stock-Operator-Investment-Classics/dp/0471770884

http://www.amazon.com/Trading-Living-Psychology-Tactics-Management/dp/0471592242/ref=pd_sim_b_27

http://www.amazon.com/exec/obidos/ASIN/0393315290/$%7B0%7D

http://www.amazon.com/Technical-Analysis-Financial-Markets-Comprehensive/dp/0735200661/ref=pd_sim_b_28

http://www.amazon.com/One-Up-On-Wall-Street/dp/0743200403/ref=pd_sim_b_26

For an introduction into two COMPLETELY different styles of investing strategies, check out
A Random Walk Down Wall Street
and The Intelligent Investor

These are essentially the two different extreme strategy of playing the same game. Of course not one is necessarily more correct than the other, but I personally think value investing has more merit than the random walk theory.

Nah, not economics. But I know some maths and how to search for publications. I've also read a couple of books.

Random Walk Down Wall Street is an excellent read and very attainable by the layman. Other than that, journals are the best place.

> Did you happen to see the other response?

Yeah, not sure if I'm going to respond though. He draws in Austrian economics (which should serve as a red flag for unfounded, unverifiable assertions). Offers no links to credible sources, and a lot of what he says is in direct contradiction to the sources I cited in my first response to him.