Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 16

Introduction to Burton Malkiel

Burton Malkiel was born on 28 August 1932 and is author of the classic A Random Walk Down Wall Street, now in its 10th edition since 1973, and eight other books on investing. He has long held a professorship at Princeton University and is a former Dean of the Yale School of Management. Recently, at the splendid age of 81, he became Chief Investment Officer for a new online investment adviser, Wealthfront.  

It’s important to understand Malkiel’s basic views before reading the interview. A ‘random walk’ as defined by Malkiel when it applies to the stock market “ … means that short-run changes in stock prices cannot be predicted.” Malkiel is a leading supporter of the efficient market hypothesis, which argues that the prices of publicly-traded assets reflect all the publicly-available information.

But Malkiel also accepts that some markets are inefficient, and while he strongly supports buying using index funds as the most effective portfolio management strategy, he does think it is viable to actively manage ‘around the edges’.

In his book, he gives four determinants affecting the value of shares. He argues a rational investor should be willing to pay a higher price for a share, other things being equal:

Rule 1: … the larger the growth rate of dividends
Rule 2: … the larger the proportion of a company’s earnings that is paid out in cash dividends
Rule 3: … the less risky the company’s stock
Rule 4: … the lower are interest rates.

With two caveats:

Caveat 1: Expectations about the future cannot be proven in the present
Caveat 2: Precise figures cannot be calculated from undetermined data.

He summarises in his book: Thus, when all is said and done, it appears there is a yardstick for value, but one that is a most flexible and undependable instrument. 

Before my interview, Malkiel made some comments in a ‘fireside chat’ with Harry Markowitz and John West of Research Affiliates.

“If someone's gone up more than average, someone else must be holding the securities that went down more than average. The beauty of indexing which I still take as almost a religion is that you are investing with minimal fees and competition has driven the ETF fees down almost to zero.

We need to be very modest about what we know and don't know about investing. The only thing that I'm absolutely sure about is that the lower the fees paid to managers, the more there will be left for me.

What you also find within active managers is that it is hard to pick the winners. Morningstar has run a study to see whether the stars they were giving to mutual funds were good predictors of future mutual fund performance. What they found is the best way to predict performance is to simply look at the fees. And there are all kinds of problems with high turnover, especially if you're a taxpayer.

I think markets are reasonably efficient. I don't mean prices are necessarily right, in fact, I think prices are always wrong, it’s just nobody knows for sure whether they’re too high or too low. But if there's some inefficiency in the market, it's the amount paid to investment managers. The finance sector has gone from 4% of GDP to 8% and about one third of that is asset management fees. There ought to be economies of scale, it only costs a tiny bit more to run $200 million as $100 million but active fees as a percentage of assets have if anything gone up. Fees have been stable overall but that’s because index fund fees have fallen.

So why do people pay those kinds of active fees? My colleague at Princeton, Danny Kahneman, would say that it's over optimism. People are convinced against overwhelming evidence that they will outperform. It's like a positively sloping demand curve, they really think that by paying more they're getting a better product. And the mutual fund industry is this enormous advertising machine to convince people to use the professionals.

What David Swenson, the CIO of Yale who has an enviable long-term track record, told me was that when he's investing in securities which a lot of people follow, and are heavily traded, he indexes. Where he makes his extra money is in private placements.”

Malkiel is also Chief Investment Officer of Wealthfront, which not surprisingly makes heavy use of ETFs in its solutions, using online investment advice focussed on the Silicon Valley community. It has a minimum account size of $5,000 and manages the first $10,000 for free, and 0.25% thereafter (this is the advice fee, separate from the management fee cost of the fund). It achieves the low cost using its online solution and the principles of modern portfolio theory as the basis for asset allocation. Malkiel believes this is the way to deliver professional advice to retail investors who cannot justify, or who do not want, a full fee relationship.

Here is Malkiel's latest research paper on asset management fees, and a review of his work from Harvard Business Review.

Click here for Burton Malkiel on "Asset Management Fees and the Growth of Finance"

Click here for Harvard Business Review on "Just How Useless Is the Asset Management Industry?"

 


 

Leave a Comment:


RELATED ARTICLES

The Burton Malkiel Interview

Three fascinating lessons overlooked by investors

Interview with David Bell, CIO, AUSCOAL Super

banner

Most viewed in recent weeks

Vale Graham Hand

It’s with heavy hearts that we announce Firstlinks’ co-founder and former Managing Editor, Graham Hand, has died aged 66. Graham was a legendary figure in the finance industry and here are three tributes to him.

The nuts and bolts of family trusts

There are well over 800,000 family trusts in Australia, controlling more than $3 trillion of assets. Here's a guide on whether a family trust may have a place in your individual investment strategy.

Welcome to Firstlinks Edition 583 with weekend update

Investing guru Howard Marks says he had two epiphanies while visiting Australia recently: the two major asset classes aren’t what you think they are, and one key decision matters above all else when building portfolios.

  • 24 October 2024

Warren Buffett is preparing for a bear market. Should you?

Berkshire Hathaway’s third quarter earnings update reveals Buffett is selling stocks and building record cash reserves. Here’s a look at his track record in calling market tops and whether you should follow his lead and dial down risk.

Preserving wealth through generations is hard

How have so many wealthy families through history managed to squander their fortunes? This looks at the lessons from these families and offers several solutions to making and keeping money over the long-term.

A big win for bank customers against scammers

A recent ruling from The Australian Financial Complaints Authority may herald a new era for financial scams. For the first time, a bank is being forced to reimburse a customer for the amount they were scammed.

Latest Updates

Shares

Looking beyond banks for dividend income

The Big Four banks have had an extraordinary run and it’s left income investors with a conundrum: to stick with them even though they now offer relatively low dividend yields and limited growth prospects or to look elsewhere.

Exchange traded products

AFIC on its record discount, passive investing and pricey stocks

A triple headwind has seen Australia's biggest LIC swing to a 10% discount and scuppered its relative performance. Management was bullish in an interview with Firstlinks, but is the discount ever likely to close?

Superannuation

Hidden fees are a super problem

Most Australians don’t realise they are being charged up to six different types of fees on their superannuation. These fees can be opaque and hard to compare across different funds and investment options.

Shares

ASX large cap outlook for 2025

Economic growth in Australia looks to have bottomed, which means it makes sense to selectively add to cyclical exposures on the ASX in addition to key thematics like decarbonisation and technological change.

Property

Taking advantage of the property cycle

Understanding the property cycle can be a useful tool to make informed decisions and stay focused on long-term goals. This looks at where we are in the commercial property cycle and the potential opportunities for investors.

Investment strategies

Is this bedrock of financial theory a mirage?

The concept of an 'equity risk premium' has driven asset allocation decisions for decades. A revamped study suggests it was a relatively short-lived phenomenon rather than the mainstay many thought.

Vale Graham Hand

It’s with heavy hearts that we announce Firstlinks’ co-founder and former Managing Editor, Graham Hand, has died aged 66. Graham was a legendary figure in the finance industry and here are three tributes to him.

Sponsors

Alliances

© 2024 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.