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IT’S A WHIMSICAL notion that Burton Malkiel ushered into popular culture in his 1973 book, “A Random Walk Down Wall Street”: A blindfolded chimpanzee throwing darts at The Wall Street Journal could do as well as the experts at picking winning stocks.
Though Malkiel is a bit perplexed at the market’s recent wild behavior, the Princeton economist isn’t suggesting you pull your savings out of professionally managed mutual funds and entrust them to a monkey.
However, he still believes in keeping investing simple: Buy and hold low-cost index funds that track broad segments of the market.
Many in the investment industry would advise against that, especially in a volatile market. Rely instead on professional fund managers to deftly move into the right stocks at the right time, the thinking goes.
With a new book out, Malkiel will have none of it.
“If you had perfect foresight, buy and hold should be dead,” the 77-year-old says. “But we don’t have perfect foresight.”
In “The Elements of Investing,” Malkiel and co-author Charles Ellis revisit some of the same advice Malkiel offered in “Random Walk,” now an investing classic.
In an interview, Malkiel discussed the new book and the implications of 2008’s stock market meltdown and 2009’s rally:
Q: You’re 77, and “Random Walk” continues to sell after 36 years. Why a new book?
A: This is geared for a broader audience. We really see this as for the person who is not an economics major in college, or a finance major at a business school.
Q: Aside from the shorter length, how is the advice in the new book different from the tips in “Random Walk”?
A: What we’ve tried to do is use the KISS principle much more — Keep It Simple, Sweetheart. In “Random Walk,” there was advice on what to do about taxes, when do you use municipal bonds, etc. With “Elements of Investing,” our idea is to completely do away with the complexities of investing, and to recommend a very simple, easy-to-use program.
For most people, this will be all they need. And it may be even overly simple. But we believe it’s very good advice for 95 percent of investors.
Q: This year, investors have been putting far more money into bond mutual funds than into stock funds, even though the market has rallied. How do you explain this?
A: If the market keeps going up, you’ll start to see those flows go into stocks, because people will then forget the bad times and the bear market. And if I were going to try to time the market, I would use that as a contrary indicator that it’s time to sell.
This is for me the great lesson of behavioral finance — namely, that there is herd behavior.
Q: What’s your take on the spike in gold prices, which hit a record of more than $1,200 an ounce a few weeks ago?
A: People see the price going up, and the money flows into gold funds.
But I think a well-diversified stock portfolio is what you ought to have. Remember: When you own stocks, you own ownership interests in real things, real factories, people who are performing real services. And stocks have been a good long-term inflation hedge, and I think they will be in the future.
Q: How have you been tweaking your own portfolio lately?
A: I pretty much have broad-scale index funds. But I have always believed that you index the core of your portfolio. Then, if you want to take some bets around the edges, fine.