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.
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: It is difficult for investors to outperform the market average. So if your return is consistently average, by definition you will beat investors — including professionals — who fall short of a benchmark. Malkiel: The reaction to the first index fund was about the same as the professional reaction to my book: poor at best and extraordinarily negative at worst. Bogle asked the underwriters to get the first index fund started and he wanted to sell $250 million. The underwriters said we don’t think we can do 250. Let’s set it up for 150. When the books were closed it raised $11 million. It was ridiculed. It was called “Bogle’s folly.
And to those who say eventually there won’t be anybody left to make the market efficient, I would say that even if 95% of the market was indexed, I wouldn’t worry. It’s not that we have too much indexing; I think we still have too little. I see nothing to make me worry that the success of indexing will lead to its own downfall, as many people believe.Malkiel: The idea behind indexing is that the market will mostly get it right.
I prefer broad-based index funds, and total stock-market index funds over S&P 500 index funds, because you ought to own everything. Since you can now buy a total stock-market index fund for an expense ratio of two or three basis points — essentially zero — that’s what I prefer. Today the CAPE is around 30, which is one of the highest in history. Realistically, people ought to expect mid-single-digit returns over the next 10 years. That worries me a little. If they’re thinking about how much they need to save for retirement, how much to take out of their retirement fund to preserve its real value, investors ought to consider that projecting 9%-10% over the next decade doesn’t make sense.
If you don’t lose all your money in the stock market.