A Random Walk Down Wall Street, written by Burton Malkiel, a Princeton economist, is an influential book on the subject of stock markets. Malkiel argues that asset prices typically exhibit signs of random walk and that one can not consistently outperform market averages. The book is frequently cited by those in favor of the efficient market hypothesis. As of January 2008, there have been 23 editions. A practical popularization is The Random Walk Guide to Investing: Ten Rules for Financial Success, (hardback: ISBN 978 0 393 05854 3) (paperback: ISBN 978 0 393 32639 0).
Malkiel has a similar critique for methods of selecting actively managed mutual funds based upon past performance. He cites studies indicating that actively managed mutual funds vary greatly in their success rates over the long term, often underperforming in years following their success, thereby reverting toward the mean. Malkiel suggests that given the distribution of fund performances, it is statistically unlikely that an average investor would happen to select those few mutual funds which will outperform their benchmark index over the long term.
There are several possible responses to these critiques. Malkiel's book and the thesis are geared toward typical investors. Professional investors, such as Warren Buffett and Peter Lynch, typically have much greater access to information, allowing for superior investment ability over individual investors. For example, Peter Lynch describes how he routinely had access to CEOs and high level officers of companies as he contemplated investing Fidelity's Magellan Fund funds into these companies, and would glean unique insights about the companies' prospects from these visits. The result of Buffett and Lynch's success may be due to superior information, financial power, or business relationships—situations that do not apply to typical investors. Thus, there may be little reason to think that average investors could duplicate these results by applying common investing techniques on their own. Moreover, even with superior information, many professional investors still underperform their benchmark indices.
From a probability perspective, some very small number of adherents of both investing strategies will, by chance, be successful multiple years in a row. It is possible that some of the success of certain famous investors is due largely to chance, and that they are simply statistical outliers. Due to selection bias, public attention focuses disproportionately on the successful investors, ignoring the much larger group of unsuccessful investors.
Can Cows Walk Down Stairs?(Can Cows Walk Down Stairs?: The Best Brains Answer the Biggest and Smallest Scientific Questions)(Brief article)(Book review)
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