A random Walk Down Wall Street: The Time-Tested Strategy for Successful Investing

SELECTED 
EMERGING-MARKET 
CLOSED-END
FUNDS SELLING AT DISCOUNTS FROM ASSET
VALUES (MAY 2010)

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A PARADOX

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Although some emerging-market closed-end funds appeared
attractive during 2010, domestic funds holding U.S. equities
were no longer selling at the bargain-basement levels that
existed in earlier periods. This illustrates an important
paradox about investment advice, as well as the maxim that
true values do eventually prevail in the market. There is a
fundamental paradox about the usefulness of investment
advice concerning specific securities. If the advice reaches
enough people and they act on it, knowledge of the advice
destroys its usefulness. If everyone knows about a “good
buy” and everyone rushes in to buy, the price of the “good
buy” will rise until it is no longer a good buy.
This is the main logical pillar on which the efficient-market
theory rests. If the spread of news is unimpeded, prices will
react quickly so that they reflect all that is known. This led
me to predict in the 1981 edition that favorable discounts
would not always be available. I wrote, “I would be very
surprised to see the early-1980s levels of discounts
perpetuate themselves indefinitely.” For the same reason, I
am skeptical that simple popular rules such as “Buy low P/E
stocks” or “Buy small company stocks” will perpetually
produce unusually high risk-adjusted returns. And I am also

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skeptical that large discounts on some emerging-market funds
will persist indefinitely.
I have recounted the story of the finance professor and his
students who spotted a $100 bill lying on the street. “If it
was really a $100 bill,” the professor reasoned out loud,
“someone would have already picked it up.” Fortunately, the
students were skeptical, not only of Wall Street professionals
but also of learned professors, and so they picked up the
money.
Clearly, there is considerable logic to the finance
professor’s position. In markets where intelligent people are
searching for value, it is unlikely that people will perpetually
leave $100 bills around ready for the taking. But history tells
us that unexploited opportunities do exist from time to time,
as do periods of speculative excess pricing. We know of
Dutchmen paying astronomical prices for tulip bulbs, of
Englishmen splurging on the most improbable bubbles, and of
modern institutional fund managers who convinced
themselves that some Internet stocks were so unlike any
other that any price was reasonable. And when investors
were overcome with pessimism, real fundamental investment
opportunities such as closed-end funds were passed by. Yet

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eventually, excessive valuations were corrected and investors
did snatch up the bargain closed-end funds. Perhaps the
finance professor’s advice should have been, “You had better
pick up that $100 bill quickly because if it’s really there,
someone else will surely take it.” It is in this sense that I
consider myself a random walker. I am convinced that true
value will out, but from time to time it doesn’t surprise me
that anomalies do exist. There may be some $100 bills around
at times, and I’ll certainly interrupt my random walk to stoop
and pick them up.