Implications for Investors

Implications for Investors

The past history of stock prices cannot be used to predict the future in any meaningful way. Technical strategies are usually amusing, often comforting, but of no real value. This is the weak form of the random-walk theory, and it is the consistent conclusion of research done at universities such as Chicago, M.I.T., Yale, Princeton, and Stanford. It has been published mainly in investment journals, but also in more esoteric ones such as Kyklos and Econometrica. Technical theories enrich only the people preparing and marketing the technical service or the brokerage firms who hire technicians in the hope that their analyses may help encourage investors to do more in-and-out trading and thus generate commission business for the brokerage firm.

The implications of this analysis are simple. If past prices contain no useful information for the prediction of future prices, there is no point in following any technical trading rule for timing the purchases and sales of securities. A simple policy of buying and holding will be at least as good as any technical procedure. Discontinue your subscriptions to worthless technical services and eschew brokers who read charts and are continually recommending the purchase or sale of securities.

There is another major advantage to a buy-and-hold strategy that I have not yet mentioned. Buying and selling, to the extent that it is profitable at all, tends to generate capital gains, which, in the late 1980s, were taxed at regular income-tax rates. Buying and holding enables you to postpone or avoid gain taxes. By following any technical strategy, you are likely to realize most of your capital gains and pay larger taxes (as well as paying them sooner) than you would under a buy-and-hold strategy. Thus simply buying and holding a diversified portfolio suited to your objectives will enable you to save on investment expense, brokerage charges, and taxes; and, at the same time to achieve an overall performance record at least as good as that obtainable using technical methods.

Burton G. Malkiel. A Random Walk Down Wall Street, including a life-cycle guide to personal investing. First edition, 1973, by W.W. Norton and company, Inc.

Implications for investors. Photo by Elena.