Monday, September 22, 2008

Book review - A Random Walk Down Wall Street

A Random Walk Down Wall Street, a book by Burton G.Malkiel, is one of those must-read books on investment/finance. I think there are 9 different editions of it and the first edition was out in 1973. I must say this book is really a good read as the author talks about a variety of topics. The author is bent towards indexing for the majority of people who do not like the hard work of picking stocks. It comes as a surprise for me too when I realized that this book is not really about the efficient market hypothesis (EMH). I feel that the stance is almost similar to Benjamin Graham in The Intelligent Investor, where he proposed about the passive and enterprising investor.

The author’s main idea in this book is that everyone should have a core portfolio of index funds. If one likes the challenge of individual stock picking, then apportion a part of the investing capital to it, but still keeping the core of index funds.

The reason I like this book is that it gives such a wide variety of investment/finance linked topics. It ranges from the stock market crashes in the past, the different types of valuation in different eras, the pros and cons of TA, FA and EMH, brief understanding of modern portfolio theory (MPT) and the related Capital asset pricing model (CAPM). As if it’s not enough, there are chapters on behavioral finance, personal finance and how guide for ‘random walkers’ in the stock market.

I admit that I am biased towards EMH, CAPM and MPT (though I said that, I actually read through William Bernstein’s classic The Four Pillars of Investing, albeit partially). This book, however, gave me another view point – a somewhat more moderate stand. The author is not an ‘extremist’ in EMH, and he mentioned that himself in the book.

One of the best parts of the book, in my opinion, comes from a story. J.P.Morgan had a friend who was so worried about his stock holdings that he could not sleep at night. So the friend asked what he should do about his stock holdings. Morgan replied, “Sell down to the sleeping point.” Much wisdom is contained in that simple reply. Yours truly had dabbled in high risk warrants (HSI warrants, not STI, mind you) with huge position in the past, and so I can truly understand what is meant by holding on to sleeping point.

Personally, I have investments in a few types of assets:

1. Bank savings account – this is certainly the safest of the lot, and certainly the most boring. Guaranteed to a super deep comatose kind of sleep (For Singapore, insured up to 20k only, aggregate)

2. MMF – this is the next safest, after bank savings. The one that I had, Phillips Money market fund, had 55.78% of their asset allocation in money market securities, 42.36% in term deposits and the remaining in cash and other accruals. Their top 5 holdings in Aug 2008 include capitaland commercial, CDL bonds and SG bonds. This should be giving investors a long afternoon naps and a good night’s sound sleep. However, recently, I had a few dreams that rouse me at night, especially after learning that such funds in US had fallen from the financial woes there.

3. Stocks – this must be like sleeping beside 100 crying babies, on a bed full of spikes, with spotlights on your face and with neighbors blasting heavy metal music all night long. However, I’ve been sleeping rather well, having accustomed to the fluctuations of the market. There is such a thing as being numb to the market.

There are many others who have CPF. These are also super safe instruments, guaranteeing a good night sleep. In fact, it's so guaranteed to provide a good sleep that you have to hold until the withdrawal age, which is increasing all the time. Rip van winkle would have approved of it :)

What's your sleeping point?


Unknown said...

LP,putting cash in the banks to be eroded by inflation can be very costly in the long run.


la papillion said...

Hi HH,

I only have 4-5 months worth of expense in banks only. The rest all dump in MMF, earning maybe 1+% interest now. Still neglible returns, but have to be like that since I forecast major spending in near term.

Really pathetic at 0.25%. Almost as if the banks dun want your money.

Anonymous said...

Hi LP,

Major spending in the near term as in picking up undervalued stocks?

It's kind of a waste that our local index fund is still not catching on and I'm forced to look overseas or invest in UTs.


Unknown said...

Hi LP,

MMF I consider as "cash".

Inflation is > 5%, "cash" is negative returns all the way. Do you see it that way?

Holding cash is extremely dangerous for the long run.


la papillion said...

Hi Derek and HH,

Major spending as in marriage within 2 yrs. It's a little too short to have it vested in the stock market as I may not have the means to hold it.

My plan is to settle marriage first (20-30k) then apportion a part for housing. Probably will keep another portion as a 'war chest' for opportunities fund, another portion for 6-8 months of living expenses, then the rest will be invested.

HH, thks for reminding me about the dangers of holding cash and cash equivalent :)

PanzerGrenadier said...


While holding cash means the value is eroded by inflation, it still beats monies that were invested in DBS High 5 Notes or Lehman Brothers Minibonds. :-P


I think investing to the point where we can sleep at night is a useful rule of thumb. Once I pared down my equities to 60% (as opposed to as high as 95%) of my portfolio at one stage, I was less concerned about market gyrations caused by Wall Street Greed.

Personally, I think it's sick that those investment bankers make tonnes of money in good years and get bailouts in bad years. :-)

Seems like a win-win game to them.