Doctor Burton Malkiel is a living legend!
His all-time classic, A Random Walk Down Wall Street, is widely regarded as one of the most influential books in the history of investment management. I can’t emphasize enough how much of an impact it had on the entire financial industry. Many of us who work in finance stand on the shoulders of this giant. I recently sat down to interview him for an episode on my Retire Sooner podcast and found him as delightful as ever.
By the way, he insisted that I call him Burt.
Burt’s Story
Burt has undergraduate and graduate degrees from Harvard, a Ph.D. from Princeton, and even served on the President’s Council of Economic Advisers in Washington, D.C. When those highlights aren’t even the best thing on your resumé, you know you’re something special. And Burt, indeed, is.
Before Random Walk’s publishing in 1973, it was not common practice for investors to use passively managed index funds as the primary tool of their investment portfolios. He was ridiculed for even suggesting it!
It was the heyday of the stockbrokers, and they were not eager to relinquish the high commissions they earned from trading and managing the assets of so many. “I would gather the data on returns, and some of my academic colleagues had done the work. And it was becoming clear that the emperor didn’t have any clothes,” Burt revealed. The industry insiders claimed to be able to out-pick the right stocks to outperform the market. They would tell people, “You don’t want an index fund. That’s guaranteed mediocrity. But, in fact, the data show that it’s superior investing.”
The Early Days of Index Funds
Those familiar with the early days of index funds are probably aware of the man credited with its creation, Jack Bogle, who went on to find The Vanguard Group. His philosophy was to put long-term patience over short-term action, and reduce broker fees. And for folks to hold low-cost index funds for a lifetime, reinvesting the dividends purchased utilizing dollar cost averaging.
It seemed to me Jack and Burt were of a similar mind, and it turned out I was right. “Jack Bogle was a great friend,” he told me. “I was on the Vanguard board for twenty-eight years. I knew Jack Bogle extremely well. We got along famously because we both did have the same philosophy. Jack was certainly one of my heroes. And I’ll tell you one of the reasons he was the hero. It’s fine for an academic to go and write a book and say, ‘Go buy index funds.’ But Jack bet his whole company on starting an index fund.”
Burt used to joke with Jack that they were the only people who held index funds when they first came out. So for a time, it was them against the world!
Since those days, investors have become more than comfortable relying on index funds. As Burt pointed out, Standard & Poor’s now generates a SPIVA Report to compare the S&P indexes vs. active management. “What’s fascinating about this,” Burt exclaims, “Is that every year when they do the report, about two-thirds of active managers do worse than, are outperformed by, a simple index. And, moreover,” he points out, “the one-third that win in one year aren’t the same as the one-third that win in the next year.” Perhaps even more eye-opening is that compounding the numbers over ten and twenty years only makes the contrast more lopsided. The S&P index runs away with a clear victory most of the time. “I’m not saying it’s impossible to outperform,” Burt admits. “Not at all. There are some people who have done it. But it’s like looking for a needle in a haystack.”
Before anyone sees fit to protest, Burt confesses that he does buy some individual stocks. So how does he justify it? Easy. Because his essential retirement assets are invested 100 percent in index funds, he is fine with getting creative around the edges. And he thinks it’s okay for you to do the same as long as your core nest egg is secure so you can count on it for retirement.
Writing A Random Walk Down Wall Street
A Random Walk Down Wall Street is a perennial book. So many people read it when they first enter the investment industry. And because Burt has updated it consistently over its lifespan, he has managed to stay current with the times. As we celebrate its fiftieth anniversary, we’re now on the thirteenth edition! I’m currently working on the second edition of my book, and I can tell you how herculean the task of thirteen editions would be. But, Burt being Burt, felt it was necessary. “A lot of the things that people can use to retire sooner were not available at the beginning, and as they have become available, they’ve been incorporated into the book.”
When he wrote the original book, there were no Roth IRAs, no 529s, and not even any money market funds. Over the years, we’ve seen so much dynamic financial innovation to help investors. But, with all that powerful, personal access comes more landmines. Burt warns, “The fact that I can buy an exchange-traded, broad-based index fund and pay two or three basis points, two or three one-hundredths of one percent, this is great, but there have also been financial innovations that can kill you. Distinguishing between the innovations that have been helpful and the innovations that can lead you astray is exactly what was the objective in making sure that I had covered all of these things.”
Burt also stresses one of my most oft-repeated refrains: time in the market is more important than timing the market. He points out how difficult it is to guess and that to capitalize, you must be right twice — when you get in and out. But, unfortunately, in his view, that’s not likely to happen.
Before letting this titan leave my sight, I had to know what keeps him going at ninety years old. He says it’s the feeling he gets when receiving letters from people who read his book and use the advice to invest their way to healthy and happy retirements. He’s never more pleased than when someone says they never made a lot of money, but by continuing to add small amounts over a lifetime, they ended up with more than a million dollars.
The mission of the Retire Sooner podcast is to help a million people retire earlier while enjoying the journey along the way. No matter where that journey takes you, I hope part of it includes a random walk down wall street. I know mine does.
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