Investment icon Malkiel's message still rings true
By Porus P. Cooper
Knight Ridder News Service
Money manager Ted Aronson recalls that back when he was a business student in the early 1970s, someone looking for investment guidance was unlikely to find much in bookstores other than "idiotic titles" promising quick riches.
Malkiel's other points: • Past performance cannot predict future performance. "Mutual funds that were the extraordinary performers of the late '90s, and whose managers were written up as geniuses, their performance during the first three years of the 2000s has been nothing short of disastrous." • Only a diversified portfolio has protected investors in the past three years. "If you have not only stocks, but also cash, bonds and real estate, at least you have had positive returns from the latter three that have offset losses in the stock market." • The current allure of dividend-paying stocks is unlikely to provide superior returns over the long run. Growth or value stocks may do better in a given decade, but, over the long run, they have similar returns. "If tomorrow we capture Osama bin Laden, I am sure the market will react positively," Malkiel said. But no one can predict the event or the extent of the market reaction, and trying to time the market is a gamble, he added.
Perhaps that was because a grim bear market and fearful investors marked that time.
More advice from money manager
Then, in 1973, rescue came from an unlikely source: a professor of economics.
Burton G. Malkiel of Princeton University came out with a book with a plain yellow cover that became required reading in Aronson's class at the Wharton School and on Wall Street.
Aronson said "A Random Walk Down Wall Street" peeled away the complexity cloaking the market to reveal home truths about investing.
Some people can beat the market some of the time, but virtually no one beats it all of the time, Malkiel wrote. Be broadly diversified, keep trading costs low, and think long term, he advised.
With more than a million copies of the book in print, the eighth edition has just hit bookstores for a new generation of investors made wary by a three-year bear market.
Malkiel's advice was hardly encouraging to an aspiring money manager such as Aronson who wanted to beat the market, but Malkiel's mantras have become guideposts at the Philadelphia investment-management firm of Aronson+Johnson+Ortiz L.P., which now manages $8 billion.
"It's not quite as schizophrenic as it might seem that I accept his criticism and still try to prove him wrong," Aronson said. "I have trouble defending the money-management industry. All of us together just suck the money out of the system."
So his firm tries to keep costs low, and clients can opt to tie fees to performance.
As for Malkiel, at age 70 he is a director at the Vanguard Group of mutual funds in Malvern, Pa., and one of the presiding deities in that temple of index funds, and the latest edition of his book testifies to both what has endured and what has evolved.
His central argument is that, over the long haul, stocks are so efficiently priced that opportunities to exploit market inefficiencies are fleeting, unpredictable and usually not worth the effort to seek them out. That argument "has stood the test of time," Malkiel said in his second-floor office at Princeton - a slender nook befitting his frame.
But he said he was skeptical now that an index fund tied to the Standard & Poor's 500 is still an adequate vehicle for diversification.
Try broader diversification, he advised, suggesting that the core of an individual portfolio be a fund tracking the Wilshire 5000 or Russell 3000.
"The S&P 500 has had an increasing amount of movement (of companies) in and out, and that creates transaction costs for the index manager," he said.
Also, "there is considerable evidence that, over the long pull, stocks of smaller companies have somewhat higher rates of return than stocks of larger companies," he said. "And, if you own the whole market, you own them as well."
Most on Wall Street - a place that Malkiel believes is "overstaffed" -apparently still believe they can beat the market.
What should investors with 20 years before retirement be thinking of doing during the next one to five years?
"They should not be thinking ahead one to five years" - unless they have children who will be going to college in a few years. "Buy a five-year bond if your kid is going to college in four years," Malkiel said.
Malkiel does not follow his script exactly. While nearly half of Vanguard's assets are in indexed funds, it still offers a menu of actively managed funds. Malkiel calls that "a business decision." He, too, dabbles in individual stocks "for fun," though not with his retirement money, he said.
