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

Should We Have Known the
Dangers?
Fraud aside, we should have known better. We should
have known that investments in transforming technologies
have often proved unrewarding for investors. In the 1850s,
the railroad was widely expected to greatly increase the
efficiency of communications and commerce. It certainly did
so, but it did not justify the prices of railroad stocks, which
rose to enormous speculative heights before collapsing in
August 1857. A century later, airlines and television

---

manufacturers transformed our country, but most of the early
investors lost their shirts. The key to investing is not how
much an industry will affect society or even how much it will
grow, but rather its ability to make and sustain profits. And
history tells us that eventually all excessively exuberant
markets succumb to the laws of gravity. The consistent losers
in the market, from my personal experience, are those who
are unable to resist being swept up in some kind of tulip-bulb
craze. It is not hard, really, to make money in the market. As
we shall see later, an investor who simply buys and holds a
broad-based portfolio of stocks can make reasonably
generous long-run returns. What is hard to avoid is the
alluring temptation to throw your money away on short, get-
rich-quick speculative binges.
There were many villains in this morality tale: the fee-
obsessed underwriters who should have known better than to
peddle all of the crap they brought to market; the research
analysts who were the cheerleaders for the banking
departments and who were eager to recommend Net stocks
that could be pushed by commission-hungry brokers;
corporate executives using “creative accounting” to inflate
their profits. But it was the infectious greed of individual

---

investors and their susceptibility to get-rich-quick schemes
that allowed the bubble to expand.
And yet the melody lingers on. I have a friend who built a
modest investment stake into a small fortune with a
diversified portfolio of bonds, real estate funds, and stock
funds that owned a broad selection of blue-chip companies.
But he was restless. At cocktail parties he kept running into
people boasting about this Net stock that tripled or that
telecom chipmaker that doubled. He wanted some of the
action. Along came a stock called Boo.com, an Internet
retailer that planned to sell with no discounts “urban chic
clothing—that was so cool it wasn’t even cool yet.” In other
words, Boo.com was going to sell at full price clothes that
people were not yet wearing. But my friend had seen the
cover of 
Time
with the headline “Kiss Your Mall Goodbye:
Online Shopping Is Faster, Cheaper, and Better.” The
prestigious firm of JP Morgan had invested millions in the
company, and 
Fortune
called it one of the “cool companies of
1999.”
My friend was hooked. “This Boo.com story will have all
the tape watchers drooling with excitement and conjuring up
visions of castles in the air. Any delay in buying would be

---

self-defeating.” And so my friend had to rush in before greater
fools would tread.
The company blew through $135 million in two years
before going bankrupt. The co-founder, answering charges
that her firm spent too extravagantly, explained, “I only flew
Concorde three times, and they were all special offers.” Of
course, my friend had bought in just at the height of the
bubble, and he lost his entire investment when the firm
declared bankruptcy. The ability to avoid such horrendous
mistakes is probably the most important factor in preserving
one’s capital and allowing it to grow. The lesson is so
obvious and yet so easy to ignore.