President's Blog

A Random Walk Down Wall Street: Searching for Alpha 40 Years Later

February 19, 2013
post contributed by Katerina Yovchev

Burton Malkiel, Chemical Bank Chairman’s professor of economics at Princeton University, and Scott MacDonald, Head of Research at MC Asset Management Holdings, were the panelists at the Roundtable’s February Event held at the New York Athletic Club, co-hosted by the Fordham Wall Street Council and moderated by Professor Kevin Mirabile, a lecturer at the Gabelli School of Business.

When in 1973 Burton Malkiel, Ph.D. published his book “A Random Walk Down Wall Street,” he introduced indexing at a time when no ETFs existed.  Malkiel began his presentation by defining market efficiency, a term often misunderstood by the public, as a state of the market where stock prices are always wrong and no one knows for sure if they are too high or too low. Accounting for survivorship bias, he said, less than a third of the equity mutual funds of the 1970s still exist now in a time when there are more equity funds than stocks. Malkiel acknowledged, however, that there were plenty of firms following active investment strategies that had great long-term records. "If I knew back in 1973 that Warren Buffet was going to be Warren Buffet, I would've said ‘Buy Berkshire Hathaway, don't buy a simple index fund,'” said Malkiel. While recognizing that fixed income managers have even harder time now beating the market, he focused on the low cost advantage of indexing and the potential of emerging markets.

Scott MacDonald, Ph.D. continued with presenting the other side of the coin- active hedge fund investing and its pros and cons. While markets are reasonably efficient, he said, even the most successful strategy will not provide a consistent return forever. MacDonald then focused on the investment appeal of emerging markets and their infrastructure, as well as the emergence of a new trend of finding alpha in real assets. Malkiel added the lack of an aging population problem in the emerging economies compared to the US and Europe and both speakers agreed on their views of corporate bonds and treasuries.

The event concluded with questions from the audience addressing the importance of timing your exit strategy and the EQ, IQ and track record of a successful manager. By adding luck to the equation, Malkiel admitted that even he doesn't index everything in his portfolio. 

"Telling someone they can't beat the market is like telling a 6 year-old that Santa Claus doesn't exist," he said. "You know, investing is fun--I even try it myself."

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