A Random Walk Down Wall Street

1、A Random Walk Down Wall Street Author: Burton Markiel Presenter: Fernando Boccanera Author lStarted career as a market professional with a leading investment firm lChemical Bank Chairmans Professorship in Economics at Princeton University lLifelong investor Book lFirst edition: 1973 l15 chapters, 4

2、parts, 396 pages lMostly text, not many figures Basic Argument lMarket prices stocks so efficiently that its very unlikely that someone can outperform the market on a consistent basis lSince the 1st edition was published 35 year ago, more than two-thirds of professional portfolio managers have been

3、outperformed by the S future prices can not be predicted Bubbles lEssential feature: greed run amok lMarket participants ignore firm foundations of value for the dubious but thrilling assumption that they too can make a kicking by building castles in the air. lSkyrocketing markets that depend on pur

4、ely psychic support have invariably succumbed to the financial law of gravity Bubble Examples lTulipmania Holland early 17th century lSouth Sea 300 year ago in England lUS 1928 Caused the big depression lJapan 1990s- Real Estate lUS 2000 - Internet Lessons Markets can be irrational for some time but

5、 eventually correct any irrationality PART II HOW THE PROS PLAY THE BIGGEST GAME IN TOWN Technical Analysis lStudies have shown that past movements in stock prices cannot be used reliably to foretell future movements; supports Random Walk Theory lThe cycles and patterns in a chart are the product of

6、 pure chance. Simulations of stock prices can produce charts that have “patterns” lAfter the fact its always possible to find a technical rule that works lTechnical Analysis is a myth Buy-and-hold strategy lWill perform at least as good as any technical analysis method lMore tax efficient because do

7、es not generate a lot of short-term capital gains Fundamental Analysis lGrowth rate in a particular period is not a good predictor of future growth rate; there is no reliable pattern lA study compared security analysts estimates or 1- year and 5-year future earnings for a large sample of companies w

8、ith the actual results. The estimates did no better than the forecast of naive models like the long-run rate of growth of national income. One-year forecast was even worse than 5-year. Fundamental Analysis lAnalysts have enormous difficulty in forecasting companies earnings prospects lNo reliable wa

9、y to pick a winner fund lMost academics dont believe in Fundamental Analysis Fundamental Analysis lAuthor is not ready to throw away Fundamental Analysis entirely lInvestors might reconsider their faith in professional advisers lAlthough there is strong evidence that markets are efficient, there are

10、 enough anomalies to make it impossible to state that the theory is conclusively demonstrated PART III THE NEW INVESTMENT TECHNOLOGY Modern Portfolio Theory lRisk oStudies show that investors have received higher rates of return for bearing greater risk oReducing Risk oDiversification with securitie

11、s that are uncorrelated or have little correlation can in fact reduce risk oDiversification can not eliminate all risks Diversification lREITs and bonds have low correlation with US stocks lInternational diversification The correlation between US stocks and international stocks is lower than the cor

12、relation among US stocks Between 1970 and 2006, the least risky portfolio was comprised of 76% US stocks and 24% international The correlation between emerging market stocks and US stocks is much lower than between US and developed markets like Europe and Japan. Evidence for the Efficient-Market The

13、ory lMost convincing tests of market efficiency are tests of the ability of professional fund managers to outperform the market lRemarkable body of evidence suggests that professional money managers are not able to outperform index funds Evidence for the Efficient-Market Theory From 1986-2005 the av

14、erage actively managed large-cap mutual fund underperformed the S after trading costs does not beat a buy-and-hold strategy Long-run return reversals lStocks that performed poorly during the past 3 years are likely to give above-average returns over the next 3 years. lMost believable pattern lMay be

15、 the reaction to fluctuations in interest rates lMay represent just reversion to the mean lThis contrarian approach if used together with a fundamental-value approach is potentially beneficial (value investing) Smaller is best lStrongly documented in studies lSmall stocks generate returns larger tha

16、n large stocks over long periods lDid not work during the 1990s but worked during 2000-2006 lNot a sure way to earn above-average, risk- adjusted returns Low Price to Earnings ratio lSeveral studies have shown that low P/E stocks produce above-average returns even after adjusting for risk lVary over

17、 time, not dependable over every period lLow P/E often justified on the basis of bad company financials lAuthor sympathizes with this value strategy Low Price to Book Value Ratio lValue strategy that tend to produce above- average returns lDocumented in famous study by Fama and French lHold for both

18、 US and many foreign stock markets Part IV Practical Guide Fitness Manual Save enough money Cover yourself Reduce taxes Understand your investment objectives Consider buying your home instead of renting it Consider bonds Consider gold because the returns have little correlation with stocks, but only

19、 for a very small part of portfolio Consider commissions and other transaction costs Diversify Projecting Returns lDeterminants of Returns of Stocks over the long run Dividend yield at time of purchase Future growth rate of earnings and dividends Long-run projected return = Initial Dividend Yield +

20、Growth Rate Projecting Returns lOver the short term (a few years), third factor is critical: Risk premium, or change in valuation relationship Can be measured by the change in Price/Earnings ratio Projecting Returns lAverage P/E ratio Vary widely from year to year In times of optimism, such as March

21、 2000, P/E was well above 30 In times of pessimism, such as 1982, P/E was 8 When interest rates are low, stocks tend to sell at high P/E. When rates are high, P/E decreases Estimating returns for years after 2006 lUnrealistic to expect the generous 18.3% stock return or 13.6% bond returns of the 198

22、2-2000 period lBonds Good-quality corporate will earn about 6% if held until maturity Treasury will earn about 5% if held until maturity Estimating returns for years after 2006 lStocks 2006 dividend yield of S&P 500 about 2%, well below the 4.5% historical average. Reasonable estimate for earnings g

23、rowth = 5.5% (consistent with historical rates during periods of restrained inflation and similar to Wall Street firms estimates in the late 2006) P/E ratio in late 2006 were in the upper teens, just slightly higher than the long-run historical average P/E changes can not be predicted. If the risk p

24、remium (P/E ratio) does not change, the expected return is 7.5% When interest rates and inflation are low, like they were in 2006, higher P/E are justified consequently the return could be greater than 7.5% Life-Cycle Investing lThe most important decision you will probably ever make concerns the as

25、set allocation between asset classes (stocks, bonds, real estate, cash, etc) lAccording to Roger Ibbotson, who has spent a lifetime measuring returns, more than 90% of an investors total return is determined by the asset categories and their allocation Five Asset-allocation principles Risk and rewar

26、d are positively related - fundamental law of finance Actual risk in stocks and bonds depend on the length of the holding period Dollar-cost averaging can reduce risk Rebalancing can reduce risk and possibly increase returns Distinguishing between attitude toward risk and capacity for risk Life-cycl

27、e Stock Buying Methods lNo-brainer lDo-it yourself lHire a professional No-brainer lBuy shares in broad-based index funds designed to track the asset classes in your portfolio lRationale: efficient-market theory lIndex funds advantages: Have on average returned 1.5% above active funds Low management

28、 fees because its passively managed Low trading costs because of low turnover Tax friendly, do not produce as much short-term taxable gains Allow small investor to diversify No-brainer lIf investor can only afford one fund, then invest in an index in a total market fund lDiversify internationally wi

29、th index funds lETFs lTax-managed index funds for taxable accounts (Vanguard tax-managed fund S&P 500) No-brainer lClose-end funds Buy those selling at a discount from net asset value During much of the 1970, CE funds sold at substantial discounts Discounts can be explained as an unexploited market

30、inefficiency Urged reads of earlier editions to take advantage If buy shares at 25% discount, still have $4 of dividend- paying assets for each $3 invested. Even if fund equaled the market return, investor still would beat the market because of dividends. Discounts have narrowed significantly in US

31、funds, most funds no longer attractive Closed-end Fund Discounts as of mid 2006 Do-it yourself method lPick your own stocks lOnly use money that can risk, the rest of the money should be indexed lTakes a lot of work and consistent winners are very rare lGrowth at a reasonable price (GARP) strategy G

32、ARP Companies that appear able to sustain above-average earnings growth for at least 5 years - growth Never pay more than justifiable by a fundamental assessment. P/E ratio not much higher than the Market P/E Buy stocks with stories of anticipated growth that can catch the interest of the crowd Trade as little as possible High turnover produces high costs Sell when the circumstances that led you to buy have changed for the worse Should sell when market is in a bubble but its ve