Summary: I talk about the mental game of investing, particularly as it applies to crypto markets. Subscribe here and follow me to get weekly updates.
I recently read A Random Walk Down Wall Street, the legendary investing guide by Princeton economics professor Burton Malkiel. It’s a classic, with over 1.5 million copies sold, and a host of glowing reviews like the following:
“If one of your New Year’s resolutions is to improve your personal finances, here’s a suggestion: Instead of picking up one of the scores of new works flooding into bookstores, reread an old one: A Random Walk Down Wall Street.” ― New York Times
“Talk to 10 money experts and you’re likely to hear 10 recommendations for Burton Malkiel’s classic investing book.” ― Wall Street Journal
“Not more than half a dozen really good books about investing have been written in the past fifty years. This one may well belong in the classics category.” ― Forbes
In this article, I’ll give you the TLDR version of this terrific book, as well as some thoughts on how to apply it to the new world of crypto investing.
A Random Walk Down Wall Street: TLDR
The stock market is basically random.
Like a drunk man staggering in a field, Malkiel argues, the stock market is inherently unpredictable. He spends the first section of the book tearing into both technical and fundamental analysis, calling them useless for predicting the future of stocks.
Of course, for those of us who love investing, the natural argument is that the stock market isn’t random: although we can’t predict the movement of any given day, we can make good bets on promising companies for the long-term.
WRONG! says Malkiel, going on to list example after example of hedge fund managers and investment gurus who may have had a few good years, but eventually fell behind the market performance.
In other words, even if they got lucky at first, eventually even the pros did worse than the overall stock market.
He spends a lot of time demonstrating investment funds that got lucky, until their luck ran out. And even if a precious few remained lucky (i.e., beating the market long-term), there’s no way for us to predict the lucky ones ahead of time.
Because the long-term future is unknowable, and the short-term future is unpredictable, Malkiel asserts that investors will be best served by just buying and holding an index fund: in essence, buying the entire stock market.
Surprise, surprise: That’s the same strategy we’ve preached for years, in our Blockchain Believers Portfolio.
Invest in the Index (for the Long Term)
For an economist, Malkiel is a pretty funny writer. He peppers in jokes, like the one about the economics professor who’s walking across campus with his graduate student, who spots a $20 bill on the sidewalk.
“Don’t pick it up,” the economics professor warns. “If it was real, it wouldn’t be there.”
The idea is that the market is perfectly efficient, and any magical ways of making money don’t exist. The best approach, then, is to buy and hold the entire market, preferably through a low-cost index fund (such as Vanguard’s VTSAX).
In any year, the stock market can go up or down. But over the long haul, the stock market has returned 10% on average, over the last 100 years. That’s a track record that most money managers, and individual investors, can't beat.
Or even if they do beat it, Malkiel will be there to beat them up.
He’s not alone in this advice: even the new version of Ben Graham’s classic The Intelligent Investor has tips from The Wall Street Journal's Jason Zweig, who says most investors will be best served by buying and holding an index fund.
Even if they’re lucky, most investors who pick their own stocks will pick away their profits by trading too frequently: every trade comes with hidden costs (like brokerage fees and tax penalties) that eat into your overall gains.
This is especially true with crypto, where the fees (transaction fees and tax penalties) can demolish your profits. Buying and holding for the long term is a core principle that applies to both the stock market and the block market.
After he spends the book telling you to just buy and hold a low-cost index fund, he then tells you what to do if you don’t like his advice: how to pick individual stocks.
How to Pick Individual Stocks (Random Walk Method)
Malkiel is like a doctor who says, “To stay healthy long-term, you really need to eat more vegetables and get exercise. But I know a lot of you don’t like vegetables or exercise. So here’s another option.”
Here are his three principles for picking winning stock investments, which applies (with some modifications) to crypto investments as well.
1) Invest in companies with prospects of high growth for five or more years. With crypto "companies," this is easy, as we’re still early in this technology. Look for established projects, with plenty of user and developer activity, using tools like our Blockchain Investor Scorecard to identify how they are likely to grow.
2) Never pay more for a stock than its “firm foundation of value,” i.e., what it’s worth. This sounds intuitive, but there are plenty of high-multiple stocks where future growth is already baked in (e.g., Tesla). Too expensive.
He admits value is impossible to estimate precisely, but you can usually get a feel that’s good enough. You can use the earnings multiple for the market as a whole as a helpful benchmark: look for growth stocks selling around the average multiple.
With crypto, we can look at metrics like our Value Per User (VPU) to see if the price you’re paying to "buy users" is in line with the market, or significantly overpriced.
3) Look for growth stories that sound like "castles in the air." You want stocks that capture the fancy and dreams of the crowd (particularly institutional investors), COMBINED with real growth prospects (#1) and a fair price (#2).
In the crypto space, we’ve been preaching the value of a great origin story since the beginning (it’s literally the first principle in our blockchain business book).
As an example, the bitcoin origin story is the greatest of all time: an anonymous founder creates a world-changing invention, then disappears.
Compare that with the legions of crypto projects that struggle to even explain how they work, which can never hope to capture the imaginations of investors.
In summary, Malkiel argues it’s a combination of these three factors that can make for good stock picks:
- Excellent growth prospects
- At a fair price
- With a sticky story.
Pearls of Wisdom
“Never buy anything from someone who is out of breath.”
This advice applies both to the stock market and the block market: avoid anyone who’s so excited about something that they make YouTube videos promising 1000X RETURNS and NEXT BIG MOONCOIN.
“It is not hard to make money in the market. What is hard to avoid is the alluring temptation to throw your money away on short, get-rich-quick speculative binges. It is an obvious lesson, but one frequently ignored.”
As we’ve said time and again, simply buying and holding a small amount of BTC and ETH has greatly outperformed a traditional investment portfolio. Most of the frequent traders and yield farmers don’t get rich quick: they get poor slowly.
“Put time on your side. Start saving early and save regularly. Live modestly and don't touch the money that's been set aside.”
For crypto investors, we’re still in the early days. Set up a steady-drip plan, and stick to it for the long term. Time takes care of the rest.
“Forecasts are difficult to make—particularly those about the future.”
As we often say, “It’s crypto. Anything can happen.”
A Random Walk Down Wall Street is a great read for building the foundation of smart investing and long-term wealth. It’s available at your local library, and you can also borrow (or buy) the audiobook.
Oh, and one more thing: he also recommends steady-drip investing.
You see, our advice isn't so random after all.
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