In his influential 1973 book, A Random Walk Down Wall Street, Burton Malkiel posited the so-called “random walk” theory of markets. The “random walk” theory contends that the stock market efficiently incorporates all existing information and investor expectations into the current price of a particular stock. That theory meant that past movements of a stock’s price couldn’t be used to predict its future movement — which would inevitably occur due to random movement and unexpected events.
Investors, this week we seemingly saw the random walk world, in all of its utterly random glory! Except this week, the “random walk” was more of a Frank Gallagheresque drunken stagger, as the market lurched drastically in one direction and then in another, with enormous one-day swings up followed by enormous one-day swings down. The result is a stock price chart that looks like the oscillations of a radio wave or an indecipherable EKG readout. And interestingly, for all of the thrashing about from one day to another, the bellwether Dow Jones Industrial Average ended the week up slightly from where it began.
What does it all mean, for those of us who have some part of our retirement savings in the stock market? Should we listen to those who try to explain why the market is moving as it is on a particular day — while recognizing that you can find stock market analysts who will take virtually every position on the explanatory spectrum, and that most of the confident predictions about what the market is and will be doing turn out to be wrong? Under the random walk theory, it’s not possible to predict what will happen to the stock indices on Monday, or by the end of next week, or during the next month. Future events that are unknowable — like the process of collecting more information about the true nature and risks of the coronavirus, whether an effective vaccine is developed, and whether people continue to have panicky reactions to the coronavirus, or come to accept it and move on with their lives — will be determinative.
A significant part of investing, in my book, is acceptance — acceptance of what the market is, and also acceptance of what your role is. Everyone I know who has tried to time the market, or made drastic decisions because of their conclusions about what would happen next, has paid an unfortunate price. Small investors are never going to have better, or faster, information. The best course in my view is to assess your own goals and recognize whether you are a long-term investor, or a short-termer. If you’re a long-term investor, who isn’t going to be needing those invested retirement savings for years, where else are you going to put your money? Put it under the mattress?