Why not go out with a bang? For his last day as the host of “Marketplace Morning Report,” David Brancaccio opted to chat with the author of what is arguably the most influential book on personal finance and investing of all time.
First published in 1973, “A Random Walk Down Wall Street” — which has more than 2 million copies in print and is in its 13th edition — argues that you cannot time when to get in or out of stocks and that trying to beat the stock market is a fool’s errand. Its author, Burton Malkiel, is a Princeton professor emeritus and still going strong at 93.
The following is an edited transcript of their full conversation.
On trying to beat the stock market
David Brancaccio: Thirteen editions of “Random Walk!” I have my dog-eared copy; I gave a gift of your book to my kids when they were starting out. But for those new to it, professor, you make the case that — what? — it’s pretty darn hard to beat the market averages by picking individual stocks?
Burton Malkiel: This was my thesis over 50 years ago. When the book first came out, it was not really accepted at that time. A lot of professionals thought this was nonsense. But the fact of the matter is, that with over 50 years of experience, we know that a simple so-called index fund, by which we mean a fund that buys all of the stocks in the stock market, does actually better than professional money managers.
Brancaccio: Now, this is not just because index funds, which are often operated robotically, have low fees; active managers charge more. It’s also just that because the market, as you argue, is so efficient and digests quite effectively available public information, it’s actually a very difficult undertaking to beat the market.
Malkiel: Market prices won’t be always right, but the judgment of the market as to where you are is likely to be better than what any active manager is likely to do. Sure, some active managers might have better insight, and they’ll make a better guess than the market. But over time, it seems to be impossible for any active manager consistently to make those bets that are better than the bets of all the investors in the market. And hence the market is efficient in that sense; it’s not that it’s always right, but that the judgment of the market has been consistently shown to be better than the judgment of individual active managers. It’s also the case that the average active manager might charge you as much as 1% of the value of the portfolio to manage the portfolio, whereas index funds, because of the competition among people like Vanguard and BlackRock and Fidelity, can now be bought at essentially zero cost.
Brancaccio: Now, none of this means you shouldn’t tend to your portfolio. Keep an eye on it, rebalance it, don’t just set it, and forget it.
Malkiel: Yes, you should keep an eye on your portfolio, but never, never, never assume that you can time the market. And that’s one of the other problems with active management: Nobody — and I mean nobody — can do it consistently. About a year ago, we had the president announce Liberation Day, huge tariffs on all foreign countries. The market collapsed that day, and a lot of active managers said, “Oh, my God! It’s the end of the world! We’ve got to go and sell all of our stocks.” And then a week later, the president reversed himself, and the market went back up. This is the problem: Nobody can time the market, and so, yes, you ought to look at your investments. You absolutely ought to care for them, but never, never, never think that you will be able to time the market and get in and out of stocks at the right time.
Brancaccio: I’m thinking of somebody though. I mean, you do acknowledge that some people are OK at this, some people have figured it out, it seems, how to beat the market. You must have known the late Jim Simons, the mathematician at Stony Brook and hedge fund manager at Renaissance Technologies. I mean, he made a fortune for his investors by taking advantage of market inefficiencies that his mathematical models seem to identify.
Malkiel: To the extent that an inefficiency arises and someone can take advantage of it temporarily, it will eventually disappear. For example, over time, people determined that there was a so-called “Christmas rally” in the stock market. That is, that the stock market would go up between Christmas and New Year’s. Well, if that’s true, what do I do as an active manager? What I do is I buy the day before Christmas, and I sell the day before New Year’s. But then I realized, because other people are doing this, I have to go and buy two days before Christmas and sell two days before New Year’s. And eventually that “inefficiency” will disappear. It is true that some active managers have taken a lot of risk and have been right, but it’s also true that a lot of hedge fund managers have taken these kinds of risks and have gone bankrupt.
On the prospect of an AI bubble
Brancaccio: Help me with the world we live in right now — artificial intelligence exuberance inflating tech stock prices astronomically, in some cases, right? Now, some say it’s a bubble; others say, “Relax.” I personally never relax. But for those worried it’s a bubble that could pop, what should they do given your experience over more than half a century?
Malkiel: The answer is nothing, but I’m very glad you brought that point up. Is it possible that we are in the midst of an AI bubble? Absolutely. We have had bubbles in the stock market with every revolutionary event. We had this with the Industrial Revolution. We had this with the beginning of railroads; railroad stocks went way up and then crashed. We had this with the internet revolution in late 1999 and early 2000, when the market then collapsed and went down 40% between the beginning of 2000 and the end of 2002. Absolutely! And we may very well be there in an AI revolution. There’s no question about that.
But here’s the problem: We don’t know if we’re in the top of the third inning of an AI bubble or the bottom of the ninth. And what I would point out to investors is, let’s go back to the internet bubble. Who was the one who pointed this out at the beginning? It was Alan Greenspan, the head of the Federal Reserve, who gave a speech that coined the term “irrational exuberance.” And so a lot of people said, “Well, you see, it was so easy to do. It was so easy to avoid the problem. Just the minute Alan Greenspan said that ‘Sell everything.'” Well, what people don’t remember is that Alan Greenspan made that speech in 1996, and the market started its collapse in March of 2000. The market went up sharply after Alan Greenspan’s speech.
And I recently looked at the following data: Suppose you had simply bought an index fund the day after Alan Greenspan’s irrational exuberance speech, and you held it through the bottom of the stock market at the end of 2002. How did that strategy do versus the average active manager? And again, the data are so clear that even in that three-year period, three-quarters of the active managers underperformed that simple buy-and-hold index strategy. So, is it possible we’re in an AI bubble? Absolutely, but your ability to determine that and your ability to time it is, I believe, absolutely zero.
And I might also say for those listeners who are worried the market is a lot lower in terms of its prices relative to earnings today than they were at the top of the internet bubble, when a lot of those internet companies sold at 100 times earnings or more. The market’s not cheap today, but it is far more reasonably priced than it was then.
