Two Investment Books On Randomness

These two investment books talk about the randomness of the capital market. One is called A Random Walk Down Wall Street: The Time-Tested Strategy for Successful Investing by Burton G. Malkiel and the other one is called Fooled By Randomness: The Hidden Role of Chance in Life and in the Markets by Nassim Nicholas Taleb.

IMHO, before anyone embarks on the journey of investing, they should at least understand the concept of EMH (Efficient Market Hypothesis) - An investment theory that states that it is impossible to "beat the market" because stock market efficiency causes existing share prices to always incorporate and reflect all relevant information. According to the EMH, this means that stocks always trade at their fair value on stock exchanges, and thus it is impossible for investors to either purchase undervalued stocks or sell stocks for inflated prices.

But since capital market is not always operated at full efficiency, this provides some profit opportunities to the investors.


This book popularized the ideas that the stock market is efficient and that its prices follow a random walk. Essentially, this means that you can't beat the market. That's right - according to Malkiel, no amount of research, whether fundamental or technical, will help you in the least. Like any good academic, Malkiel backs up his argument with piles of research and statistics. It would be an understatement to say that these ideas are controversial, and many consider them just short of blasphemy. But whether you agree with Malkiel's ideas or not, it is not a bad idea to take a look at how he arrives at his theories. (http://www.investopedia.com)

This book also popularized the concept of "Buy and Hold" for long term.



In Fooled by Randomness, Nassim Nicholas Taleb, a professional trader and mathematics professor, examines what randomness means in business and in life and why human beings are so prone to mistake dumb luck for consummate skill. This eccentric and highly personal exploration of the nature of randomness meanders from the court of Croesus and trading rooms in New York and London to Russian roulette, Monte Carlo engines, and the philosophy of Karl Popper. It addresses the apparently irrational movement of money markets around the world. (Amazon.com)


No matter how well your research on the market is, the market is still prone to randomness - one cannot really predict the market. That's why some portfolio managers try to predict how much they can lose in the worst case scenario over a period of time by using a methodology called Monte Carlo Simulation.

(Note: Nassim Nicholas Taleb has a new book called The Black Swan: The Impact of the Highly Improbable)