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Burton Malkiel

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Burton Malkiel: The Unsexy Secret to Building Wealth

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“A blindfolded chimpanzee throwing darts at the stock listings can select a portfolio that performs as well as those managed by experts.”

So wrote Burton Malkiel, professor emeritus of economics at Princeton University, in his 1973 classic “A Random Walk Down Wall Street.”

Today, that remains his considered opinion, as he tells ThinkAdvisor in an interview.

“The evidence is so clear that I believe that hypothesis even more strongly than I did 50 years ago because time after time the data proves it,” Malkiel says.

His mega-bestseller has had 15 editions, and on Jan. 3, W.W. Norton will publish the revised and updated 50th anniversary edition of “A Random Walk Down Wall Street: The Best Investment Guide That Money Can Buy.”

Malkiel’s main thesis still is: “The future is inherently unpredictable.” Therefore, regularly invest in broad-based index funds and stay far away from investment advisors, who have been proven wrong too many times, he says in the interview.

As for Malkiel’s own prediction for the stock market and economy, he forecasts that “growth of the economy is likely to be slower than in the past because of demographics.”

And “even though in the long run, common stocks have given 9% [returns], they will do less than that in the future. It’s going to be a very tough environment,” he says.

At 90, Malkiel is the chief investment officer of Wealthfront, a robo-advisor that invests in index funds.

That dovetails with the investment philosophy he’s been espousing for half a century now.

“Investing in a broad-based index fund” — typically thorough dollar cost averaging — “doesn’t sound too sexy, but it’s the secret to building wealth,” he insists.

The professor likes automated digital services because for one, they facilitate investing regularly.

“There are several aspects of investment management that an automated advisor can do more efficiently than a traditional face-to-face advisor,” he writes.

“My hope is that if you follow the rules in the book, you don’t need one,” he says in the interview.

Now a Princeton research associate, Malkiel is on the investment committee of advisory firm Rebalance and the advisory board of Research Affiliates.

He was a director of The Vanguard Group for 28 years.

He began his career as an investment banker at Smith Barney. In 1964, he received a doctorate from Princeton and joined the faculty.

He took brief stints away from Princeton as dean of the Yale School of Management after being a member of the Council of Economic Advisers during the Gerald Ford presidency.

Malkiel, who conceived the concept of an index fund before the first commercial fund existed, has no enthusiasm for most newer investing methodologies, certainly not as the basis of a retirement portfolio.

These include smart beta, factor investing and ESG investing, though they might be OK as an ”add-on,” he notes.

In the interview he opines on cryptocurrency (“avoid”) and nonfungible tokens (“absolutely crazy”).

The newest edition of “A Random Walk,” peppered with jokes and cartoons, is a comprehensive 432-page walk through market bubbles, behavioral finance, practical investing applications and more.

ThinkAdvisor interviewed Malkiel, who’s based in Princeton, New Jersey, and was speaking from his Florida winter home, by phone on Dec. 22.

A “gambling instinct,” as he self-describes, encourages the famed indexer to also invest in individual stocks, as well as play blackjack in Las Vegas.

Both endeavors are, he says, only for “fun.”

Here are highlights of our conversation:

THINKADVISOR: In the 50th anniversary edition of “A Random Walk Down Wall Street,” you write, as you did in the first edition, that even “a blindfolded chimpanzee throwing darts at the stock listings can select a portfolio that performs as well as those managed by the experts.”

Why do you still believe that?

BURTON MALKIEL: The evidence is so clear that I believe in that hypothesis even more than when I first wrote the book, even more strongly than I did 50 years ago because time after time the data proves it.

Every year it turns out that two-thirds of active managers are beaten by a broad-based index. The index I use is the S&P 1500.

The one-third that beats the average one year isn’t the same as the one-third that wins the next year.

So when you compound that and look over 10 years, you find that 90% of active managers do worse than an index.

I’m not saying there’s nobody who can outperform. Warren Buffett can, though recently, he hasn’t.

He’s said he’s directed that his estate be invested in an index fund.

What’s the main thrust of “A Random Walk”?

The idea is that there are so many things that happen in the world that you simply can’t predict. The future is inherently unpredictable.

The [essence] is to avoid mistakes by staying with a regular investment policy of savings and investing in a broad-based index fund.

That doesn’t sound too sexy, but it’s the secret to building wealth.

You write that Wall Street considers your book “an obscenity.” Why do you say that?

If you’re a money manager running an active fund and say [to a client], “You want to buy my fund because I can beat the market — and that’s why you’re paying me [high amount] to manage the fund,” and I come along saying, “The emperor has no clothes — you can’t beat the market,” [the money manager] won’t like it.

So in that sense, it’s an obscenity.

Why have you no faith in technical analysis, as you write?

The short answer is: It doesn’t work. There’s a little momentum in the market — I agree with that. But sometimes the momentum crashes in a heartbeat.

So technical analysis isn’t a dependable way of beating the market. My own work suggests that, while the market isn’t a perfect random walk, it’s very close to it.

You hold the position of chief investment officer of Wealthfront. What attracted you to work with an automated investment service, aka a robo-advisor?

In large part because Wealthfront is using index funds, which are exactly what I’ve recommended.

Investment advisors will charge people 1%, 2%, 3% to handle their portfolios, and there are some conflicts there.

I’m delighted to be associated with a company that [invests using] software and charges 25 basis points.

You didn’t write much in the new edition about financial advisors? How come?

I did, in a way, when I talked about Wealthfront [for example: “There are several aspects of investment management that an automated adviser can do more efficiently than a traditional face-to-face adviser.”].

My hope is that if you follow the rules in the book, you don’t need one.

You thought up the concept of the index fund even before an index fund existed for the public. Right?

Yes, indeed. I’m a skeptic. So when I was at Smith Barney, where I started my career, I wondered whether the emperor really had any clothes [because] data was beginning to be shown about stock market returns.

I looked at what the market averages were and at what active managers were doing, and I thought, “My God, the market is doing better than the active managers!”

That’s what [prompted] my idea. Three years after my book was published, Jack Bogle [Vanguard founder] started the first index fund [in 1976].

What’s your forecast for the stock market in the near future?

Valuations are certainly still high. I worry a lot about the fact that inflation has been very sticky, and I think it will continue to be sticky.

The growth of the economy is likely to be slower than it has been in the past, in part because of the demographics of the country.

The labor force is growing very slowly because fertility rates have been low, and [at the same time] the population is aging rapidly. We have more and more of the population [at] retirement [age] rather than working age.

What are the implications for investors?

People need to be quite realistic about the future: Even though in the long run, common stocks have given 9%, they will do less than that in the future.

So if you’re planning for retirement, that might mean you have to save a bit more.

However, it’s a mistake to bet against the U.S. economy. Even during the very bad decades — 1970s and the first decade of the 2000s — when the stock market did nothing, the person who put a modest amount of money in the market every month, every pay period — every year, still did well.

How well?

The dollar-cost averager made almost 6% a year because often in a volatile market when prices are down, you buy more shares of index funds, and therefore your average cost is lower than the average of the prices that exist in the market.

I’m not a Pollyanna. I think it’s going to be a very tough environment. But it’s still the case that regular investing in common stock for one’s retirement is without question the best thing to do.

You write about newer developments in finance, like smart beta, factor investing, ESG investing. Do you recommend these for a retirement portfolio?

I don’t. Certainly the basic core of any portfolio ought to be broad-based index funds.

My book shows that the broad-based funds that are factor based or ESG based have not, in fact, given people returns as large as are available from broad-based index funds.

Should investors not consider these newer approaches at all, then?

If you want to do something like ESG investing, for example, do it as an add-on. Have your basic retirement portfolio in broad-based index funds. Then, if you want to invest in a company that makes solar panels or wind power and it would make you feel good, I think that’s terrific.

Please talk about the amusing “Sleeping Scale” chart — from “Semi-comatose” to “Bouts of Insomnia” — that you have in your book.

I’ve always tried to put in some kind of humor. In the last couple of editions, I’ve had the “Sleeping Scale.”

The past year has been a lousy one in the stock market. When you saw those big declines, and it made you sick and you couldn’t sleep at night, then a portfolio that’s 100% common stock isn’t for you.

You also have a section called “Stupid Investor Tricks” — a la David Letterman’s old “Stupid Pet Tricks.” You write: “Be wary of new issues, stay cool to hot tips, distrust foolproof schemes.”

Your message seems to be there are people eager to dupe you. Is that right?

You bet. That’s exactly right. If only [investors] would understand that there are a lot of shifty people out there — unfortunately, a lot of them in the finance industry.

So avoiding things like that is absolutely almost as critical as needing to do the right thing — you need to avoid doing the wrong thing.

Could paying attention to behavioral finance be helpful?

Avoiding errors is a good part of the issue, and understanding behavioral finance and biases and the tricks that your [own] mind sometimes plays on you is extremely important.

Often individuals can be their own worst enemy. It’s helpful to know yourself and the errors that people are prone to make.

There are two basic things you need to do in investing: the right thing — invest in broad-based index funds. The other: avoid mistakes.

Cryptocurrency is most certainly in the news. Please elaborate on why you write, “Avoid crypto.”

My advice on crypto is simply one word: avoid. When I look at bitcoin, are there any uses for it?

Well, if I wanted to sell or buy drugs with a transaction that didn’t go through my credit card or checking account where people could find it, maybe the anonymous nature of bitcoin would be an advantage — if I wanted to do something illegal.

But exactly for that reason, I can’t believe that in the long run, governments will let a lot of these [crypto approaches] continue.

Bitcoin is not what you want to invest in as a reasonable long-term investment.

You also say to avoid non-fungible tokens — NFTs — and you cite a bizarre example of a woman selling her bottled flatulence as NFTs. Thoughts?

A lot of things, like NFTs, are just absolutely crazy.

[NFTs] are bubbles, and there will be more of them in the future.

Boy, oh boy, NFTs, crypto, dogecoins and bitcoin are in the category of mistakes. Just avoid them.

What do you think of other new technologies that focus on money?

My sense is that we’ll see a lot of improvements in the international payment system. And it wouldn’t surprise me if we had a digital dollar at some point.

What’s the main pitfall to your method of investing?

Just as it’s difficult for people to keep on a diet, for the recommendation that I make about regular small investing over time, you’ve got to have the will power to keep doing it.

And you’ve got to have the will power that, when the sky is falling, like in 1987, when the market went down 20% in one day, and in 2007, when the world’s financial system was collapsing, instead of saying, “I’ve got to stop now,” to keep on doing it no matter what you hear. And that’s not easy.

Is that, then, an opportunity to remember the biases of behavioral finance?

Yes. keeping at it [dollar-cost averaging] and not feeling, “Oh, my neighbor is getting rich on bitcoin. I’ll sell everything and put it into bitcoin” or “I know I can time the market.”

“Partial annuitization is the only no-risk way of insuring that you won’t outlive your income,” you write. Please elaborate.

You ought to do some of that. It certainly reduces risk. But the problem is that a lot of annuities are very expensive. So I don’t want you to annuitize everything.

Now, if you have enough money that you don’t have to worry, I wouldn’t annuitize. But for people who want a guarantee that they won’t outlive their income, partial annuitization would make sense.

You’re an investor in individual equities, in addition to index funds. How come?

Frankly, I’ve got a little bit of a gambling instinct. I buy some individual stocks because it’s fun. But I’m able to do so because my basic real money, my retirement money, is all in index funds.

I have a large IRA. That retirement account is entirely in index funds, and I’ve got enough [money] so that I’m not worried about outliving my income.

When do you think it’s appropriate for investors, in general, to buy individual equities?

I have no objection to people doing that. This all goes back to whether you believe in factor investing or ESG investing, for example.

If you want to do these things as add-ons, just make sure the serious money you need for retirement is invested, so that you don’t have to worry about not having a comfortable retirement. That money should be in index funds.

How else do you satisfy your gambling urge? Ever bet at the racetrack?

I do. It’s fun watching a horse race. And I’ll go to Las Vegas. I’ll go to Atlantic City. I’ll sit down at the blackjack table. I like to gamble. It’s fun.

But I don’t do these things thinking, “This is the way I’m going to make money.”

At age 90, what’s the secret to your longevity and mental acuity?


I’ve got a couple of lousy knees and a gimpy hip. So I need to make sure that when I’m going down steps, I hang onto the handrails.

And I do try to exercise and eat well.

There’s probably a lot of luck involved too — and I’ve been very fortunate.


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