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

“Leaping tall buildings in a single
bound is nice, but can you
outperform the S&P 500 Index?”
© 2002 by Thomas Cheney: Reprinted
with permission.
Despite all the evidence to the contrary, suppose an
investor still believed that superior investment management

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really does exist. Two issues remain: First, it is clear that
such skill is very rare; and second, there appears to be no
effective way to find such skill before it has been
demonstrated. As I indicated in chapter 7, the best-
performing funds in one period of time are not the best
performers in the next period. The top performers of the
1990s had dreadful returns in the first decade of the 2000s.
Paul Samuelson summed up the difficulty in the following
parable. Suppose it was demonstrated that one out of twenty
alcoholics could learn to become a moderate social drinker.
The experienced clinician would answer, “Even if true, act as
if it were false, for you will never identify that one in twenty,
and in the attempt five in twenty will be ruined.” Samuelson
concluded that investors should forsake the search for such
tiny needles in huge haystacks.
Stock trading among institutional investors is like an
isometric exercise: lots of energy is expended, but between
one investment manager and another it all balances out, and
the trading costs the managers incur detract from
performance. Like greyhounds at the dog track, professional
money managers seem destined to lose their race with the
mechanical rabbit. Small wonder that many institutional

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investors, including Intel, Exxon, Ford, American Telephone
and Telegraph, Harvard University, the College Retirement
Equity Fund, and the New York State Teachers Association,
have put substantial portions of their assets into index funds.
By 2010, about one-third of institutional investment funds
were “indexed.”
How about you? When you buy an index fund, you give
up the chance of boasting at the golf club about the fantastic
gains you’ve made by picking stock-market winners. Broad
diversification rules out extraordinary losses relative to the
whole market; it also, by definition, rules out extraordinary
gains. Thus, many Wall Street critics refer to index-fund
investing as “guaranteed mediocrity.” But experience shows
conclusively that index-fund buyers are likely to obtain
results exceeding those of the typical fund manager, whose
large advisory fees and substantial portfolio turnover tend to
reduce investment yields. Many people will find the
guarantee of playing the stock-market game at par every
round a very attractive one. Of course, this strategy does not
rule out risk: If the market goes down, your portfolio is
guaranteed to follow suit.
The index method of investment has other attractions for

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the small investor. It enables you to obtain very broad
diversification with only a small investment. It also allows
you to reduce brokerage charges. The index fund, by pooling
the moneys of many investors, trades in larger blocks and can
negotiate minimal brokerage fees on its transactions. The
index fund does all the work of collecting the dividends from
all of the stocks it owns and sending you each quarter one
check for all of your earnings (earnings that, incidentally, can
be reinvested in the fund if you desire). In short, the index
fund is a sensible, serviceable method for obtaining the
market’s rate of return with absolutely no effort and minimal
expense.