Burton G. Malkiel Quote
WHAT DOES IT ALL MEAN? The lessons of market history are clear. Styles and fashions in investors’ evaluations of securities can and often do play a critical role in the pricing of securities. The stock market at times conforms well to the castle-in-the-air theory. For this reason, the game of investing can be extremely dangerous. Another lesson that cries out for attention is that investors should be very wary of purchasing today’s hot new issue. Most initial public offerings underperform the stock market as a whole. And if you buy the new issue after it begins trading, usually at a higher price, you are even more certain to lose. Investors would be well advised to treat new issues with a healthy dose of skepticism. Certainly investors in the past have built many castles in the air with IPOs. Remember that the major sellers of the stock of IPOs are the managers of the companies themselves. They try to time their sales to coincide with a peak in the prosperity of their companies or with the height of investor enthusiasm for some current fad. In such cases, the urge to get on the bandwagon—even in high-growth industries—produced a profitless prosperity for investors.
WHAT DOES IT ALL MEAN? The lessons of market history are clear. Styles and fashions in investors’ evaluations of securities can and often do play a critical role in the pricing of securities. The stock market at times conforms well to the castle-in-the-air theory. For this reason, the game of investing can be extremely dangerous. Another lesson that cries out for attention is that investors should be very wary of purchasing today’s hot new issue. Most initial public offerings underperform the stock market as a whole. And if you buy the new issue after it begins trading, usually at a higher price, you are even more certain to lose. Investors would be well advised to treat new issues with a healthy dose of skepticism. Certainly investors in the past have built many castles in the air with IPOs. Remember that the major sellers of the stock of IPOs are the managers of the companies themselves. They try to time their sales to coincide with a peak in the prosperity of their companies or with the height of investor enthusiasm for some current fad. In such cases, the urge to get on the bandwagon—even in high-growth industries—produced a profitless prosperity for investors.
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About Burton G. Malkiel
Malkiel is the Chemical Bank chairman's professor of economics at Princeton University, and is a two-time chairman of the economics department there. He was a member of the Council of Economic Advisers (1975–1977), president of the American Finance Association (1978), and dean of the Yale School of Management (1981–1988). He also spent 28 years as a director of the Vanguard Group. He is Chief Investment Officer of software-based financial advisor, Wealthfront Inc. and as a member of the Investment Advisory Board for Rebalance. Malkiel was elected to the American Philosophical Society in 2001.
He is a leading proponent of the efficient-market hypothesis, which contends that prices of publicly traded assets reflect all publicly available information, although he has also pointed out that some markets are evidently inefficient, exhibiting signs of non-random walk. Malkiel in general supports buying and holding index funds as the most effective portfolio-management strategy, but does think it is viable to actively manage "around the edges" of such a portfolio, as financial markets are not totally efficient. In a 2020 interview, Malkiel also stated he was not opposed in principle to investing or trading in single stocks (as exemplified by the popularity of Robinhood), provided the large majority of one's portfolio is index funds.