Random Walk Investment Theory

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by William P. Meyers

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The random walk investment theory states that stocks and other securities are priced appropriately except for random, unpredictable variations. If true, it means that no strategy or amount of research will, on average, pay off better than any other strategy.

This appears to be wrong at first glance because whether you talk to individual investors, or look at big mutual funds, there are those that do well, and those that do poorly, in any given period of time. However, most investors will get close to an average rate of returns. With so many investors in the field, some are bound to make trades that work out better than average over some time period. A few will do much better than average. But it isn't because they are better at analyzing charts or picking value stocks. It is become some players have to do better than average to balance out those who do worse than average.

The best known explanation of the theory is Burton G. Malkiel's A Random Walk Down Wall Street, which in the Preface to later editions restates the thesis thus: "the market prices stocks so efficiently that a blindfolded chimpanzee throwing darts at the Wall Street Journal can select a portfolio that performs as well as those managed by the experts."

If so, you can save yourself a lot of money by using our random stock pickers to select your investment portfolio.

On the other hand, maybe too many of the "experts" aren't really very smart.



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