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Market prices follow a random walk from "summary" of A Random Walk Down Wall Street by Burton Gordon Malkiel
The idea that market prices follow a random walk may seem counterintuitive to many investors. After all, we like to believe that there is some rhyme or reason behind the movements of stock prices. We want to think that we can predict where the market is headed and make profitable trades based on our analysis. However, the reality is that trying to predict the future movements of stock prices is a futile exercise. As Burton Gordon Malkiel explains in his book "A Random Walk Down Wall Street," market prices are influenced by an almost countless number of factors, many of which are unpredictable and random in nature. Malkiel argues that attempting to outsmart the market by picking individual stocks or timing the market is a fool's errand. The efficient market hypothesis suggests that all available information is already reflected in stock prices, making it impossible to consistently beat the market through stock selection or market timing. In fact, Malkiel goes so far as to say that trying to pick winning stocks or time the market is akin to gambling. Just as a roll of the dice is random and unpredictable, so too are the movements of stock prices. No amount of analysis or research can reliably predict whether a stock will go up or down in the short term. Instead of trying to outguess the market, Malkiel advocates for a passive investing strategy that involves owning a diversified portfolio of low-cost index funds. By holding a broad array of stocks or bonds, investors can capture the returns of the overall market without the need to constantly buy and sell individual securities.- The concept that market prices follow a random walk is a fundamental principle of modern finance. By accepting the randomness of stock price movements and focusing on long-term investing principles, investors can improve their chances of achieving their financial goals without unnecessary risk or speculation.
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