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Book-Summary - A Random Walk Down Wall Street

Burton gives a deep dive on the investing. This book explains all the different economic bubbles to give a historical context of investing. He also explains in detail about all the different terminologies of the investing. Investment is buying of an asset for gaining profits in the form of predictable income like interests, dividends, etc or appreciation of the value of asset. The time when investment returns and predictability of profits makes it an investment vs a speculation

There are 2 types of theory which helps to identify the value of an asset/company, so that we can pick the stocks in them -

  • Firm foundation theory - finding intrinsic value. Based on different parameters, try to find the actual value of the asset.
  • castle in the air theory - psychology of masses instead of finding actual value

Both of them has some speculation part involved. As a result, it is not good. Also, if I am able to come up with the value, then someone else is also able to find that value. Hence, there is no actual advantage involved. So, there is no point in timing the market.

The most important point he puts through in the book is do not try to time the market. The only sensible way of investing is to buy shares of all the companies in the market aka index funds. Always, look for long time value creators and not glittery stuff which is talked by everyone. These long time value creators are usually very boring.

Here are some important points, he puts through in the book -

  • The primary or Step 0 of investing is saved money. We need to have enough money saved to start the investing.
    • We need to regularly keep saving the money. In the long, run it always helps.
  • Risk and Returns are related. More riskier the investment, higher the returns. Similarly less riskier once will give less returns.
  • We will get the accepted returns if the the amount of time we hold on to the investment is higher. As it gets longer, the variance of returns reduces.
  • Have discipline of investing regularly. Dollar-cost averaging/SIP is the key to sail through the bubbles and burst. They help reduce the variance and reduce the risk.
  • Always re-balance your portfolio. This helps to reduce the risk and improve the returns.
  • There is a difference between ability to take risk vs capacity to take risk. Usually your capacity should detect your ability to take risk.
    • Understand what level of risk are you ready to take.
  • Define the need or goal of an investment. Based on the goal, you can choose the type of investment.
  • The asset mix provided is - cash, stocks, bonds, real estate. Each will have different proportions of your asset. Based on the age, these proportions need to be varied.
  • For stocks and bonds, invest in index funds. Do not go for actively managed funds or do not directly buy company shares. Even real estate can be an index bond tracking REIT.
  • The stocks should be divided among US market (India market if in India), developed market fund and developing market fund.
  • Even if you really want to pick the stocks, then make sure your 80% of investment (I would say 95%) is in the index funds and then only play with the remaining.

This is a very good book for investing and I strongly suggest to read it.