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

A RANDOM WALKER’S ADDRESS
BOOK AND REFERENCE GUIDE
TO MUTUAL FUNDS

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*
Adjusted for stock splits and the value of rights received
subsequent to March 3, 1928.

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Golconda, now in ruins, was a city in India. According to
legend, everyone who passed through it became rich.

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*
Adjusted for stock splits and the value of rights received
subsequent to September 3, 1929.

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*
The point can be made another way by noting that because
higher interest rates enable us to earn more now, any deferred
income should be “discounted” more heavily. Thus, the
present value of any flow of future dividend returns will be
lower when current interest rates are relatively high. The
relationship between interest rates and stock prices is
somewhat more complicated, however, than this discussion
may suggest. Suppose investors expect that the rate of
inflation will increase from 5 percent to 10 percent. Such an
expectation is likely to drive interest rates up by about 5
percentage points to compensate investors for holding fixed-
dollar-obligation bonds whose purchasing power will be
adversely affected by greater inflation. Other things being the
same, this should make stock prices fall. But with higher
expected inflation, investors may reasonably project that
corporate earnings and dividends will also increase at a faster
rate, causing stock prices to rise. A fuller discussion of
inflation, interest rates, and stock prices is contained in
chapter 13.

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Edward O. Thorp actually did find a method to win at
blackjack. Thorp wrote it all up in 
Beat the Dealer
. Since
then, casinos switched to the use of several decks of cards to
make it more difficult for card counters and, as a last resort,
they banished the counters from the gaming tables.

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If such a regularity was known to only one individual, he
would simply practice the technique until he had collected a
large share of the marbles. He surely would have no incentive
to share a truly useful scheme by making it available to
others.

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Consists of all Lipper equity categories.

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If we had let the losers continue to play (as mutual-fund
managers do, even after a bad year), we would have found
several more contestants who flipped eight or nine heads out
of ten and were therefore regarded as expert coin-flippers.

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*
These tests are often referred to as tests of the “semi-
strong” form of the efficient-market hypothesis. As
mentioned earlier, the “weak” form asserts that past price
information cannot be exploited to develop successful trading
strategies. The “semi-strong” form says that no publicly
announced news event can be exploited by investors to obtain
above-average returns.

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Statisticians use the term “covariance” to measure what I
have called the degree of parallelism between the returns of
the two securities. If we let R stand for the actual return from
the resort and be the expected or average return, whereas
U stands for the actual return from the umbrella manufacturer
and 
the average return, we define the covariance between
U and R (or COV
UR
) as follows:
COV
UR
= Prob. rain (