Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 16

Introduction to Burton Malkiel

Burton Malkiel was born on 28 August 1932 and is author of the classic A Random Walk Down Wall Street, now in its 10th edition since 1973, and eight other books on investing. He has long held a professorship at Princeton University and is a former Dean of the Yale School of Management. Recently, at the splendid age of 81, he became Chief Investment Officer for a new online investment adviser, Wealthfront.  

It’s important to understand Malkiel’s basic views before reading the interview. A ‘random walk’ as defined by Malkiel when it applies to the stock market “ … means that short-run changes in stock prices cannot be predicted.” Malkiel is a leading supporter of the efficient market hypothesis, which argues that the prices of publicly-traded assets reflect all the publicly-available information.

But Malkiel also accepts that some markets are inefficient, and while he strongly supports buying using index funds as the most effective portfolio management strategy, he does think it is viable to actively manage ‘around the edges’.

In his book, he gives four determinants affecting the value of shares. He argues a rational investor should be willing to pay a higher price for a share, other things being equal:

Rule 1: … the larger the growth rate of dividends
Rule 2: … the larger the proportion of a company’s earnings that is paid out in cash dividends
Rule 3: … the less risky the company’s stock
Rule 4: … the lower are interest rates.

With two caveats:

Caveat 1: Expectations about the future cannot be proven in the present
Caveat 2: Precise figures cannot be calculated from undetermined data.

He summarises in his book: Thus, when all is said and done, it appears there is a yardstick for value, but one that is a most flexible and undependable instrument. 

Before my interview, Malkiel made some comments in a ‘fireside chat’ with Harry Markowitz and John West of Research Affiliates.

“If someone's gone up more than average, someone else must be holding the securities that went down more than average. The beauty of indexing which I still take as almost a religion is that you are investing with minimal fees and competition has driven the ETF fees down almost to zero.

We need to be very modest about what we know and don't know about investing. The only thing that I'm absolutely sure about is that the lower the fees paid to managers, the more there will be left for me.

What you also find within active managers is that it is hard to pick the winners. Morningstar has run a study to see whether the stars they were giving to mutual funds were good predictors of future mutual fund performance. What they found is the best way to predict performance is to simply look at the fees. And there are all kinds of problems with high turnover, especially if you're a taxpayer.

I think markets are reasonably efficient. I don't mean prices are necessarily right, in fact, I think prices are always wrong, it’s just nobody knows for sure whether they’re too high or too low. But if there's some inefficiency in the market, it's the amount paid to investment managers. The finance sector has gone from 4% of GDP to 8% and about one third of that is asset management fees. There ought to be economies of scale, it only costs a tiny bit more to run $200 million as $100 million but active fees as a percentage of assets have if anything gone up. Fees have been stable overall but that’s because index fund fees have fallen.

So why do people pay those kinds of active fees? My colleague at Princeton, Danny Kahneman, would say that it's over optimism. People are convinced against overwhelming evidence that they will outperform. It's like a positively sloping demand curve, they really think that by paying more they're getting a better product. And the mutual fund industry is this enormous advertising machine to convince people to use the professionals.

What David Swenson, the CIO of Yale who has an enviable long-term track record, told me was that when he's investing in securities which a lot of people follow, and are heavily traded, he indexes. Where he makes his extra money is in private placements.”

Malkiel is also Chief Investment Officer of Wealthfront, which not surprisingly makes heavy use of ETFs in its solutions, using online investment advice focussed on the Silicon Valley community. It has a minimum account size of $5,000 and manages the first $10,000 for free, and 0.25% thereafter (this is the advice fee, separate from the management fee cost of the fund). It achieves the low cost using its online solution and the principles of modern portfolio theory as the basis for asset allocation. Malkiel believes this is the way to deliver professional advice to retail investors who cannot justify, or who do not want, a full fee relationship.

Here is Malkiel's latest research paper on asset management fees, and a review of his work from Harvard Business Review.

Click here for Burton Malkiel on "Asset Management Fees and the Growth of Finance"

Click here for Harvard Business Review on "Just How Useless Is the Asset Management Industry?"

 


 

Leave a Comment:

RELATED ARTICLES

The Burton Malkiel Interview

Three fascinating lessons overlooked by investors

Interview with David Bell, CIO, AUSCOAL Super

banner

Most viewed in recent weeks

Raising the GST to 15%

Treasurer Jim Chalmers aims to tackle tax reform but faces challenges. Previous reviews struggled due to political sensitivities, highlighting the need for comprehensive and politically feasible change.

7 examples of how the new super tax will be calculated

You've no doubt heard about Division 296. These case studies show what people at various levels above the $3 million threshold might need to pay the ATO, with examples ranging from under $500 to more than $35,000.

The revolt against Baby Boomer wealth

The $3m super tax could be put down to the Government needing money and the wealthy being easy targets. It’s deeper than that though and this looks at the factors behind the policy and why more taxes on the wealthy are coming.

Meg on SMSFs: Withdrawing assets ahead of the $3m super tax

The super tax has caused an almighty scuffle, but for SMSFs impacted by the proposed tax, a big question remains: what should they do now? Here are ideas for those wanting to withdraw money from their SMSF.

Are franking credits hurting Australia’s economy?

Business investment and per capita GDP have languished over the past decade and the Labor Government is conducting inquiries to find out why. Franking credits should be part of the debate about our stalling economy.

Here's what should replace the $3 million super tax

With Div. 296 looming, is there a smarter way to tax superannuation? This proposes a fairer, income-linked alternative that respects compounding, ensures predictability, and avoids taxing unrealised capital gains. 

Latest Updates

Investment strategies

9 winning investment strategies

There are many ways to invest in stocks, but some strategies are more effective than others. Here are nine tried and tested investment approaches - choosing one of these can improve your chances of reaching your financial goals.

Planning

Super, death and taxes – time to rethink your estate plans?

The $3 million super tax has many rethinking their super strategies, especially issues of wealth transfer on death. This reviews the taxes on super benefits and offers investment alternatives.

Taxation

Raising the GST to 15%

Treasurer Jim Chalmers aims to tackle tax reform but faces challenges. Previous reviews struggled due to political sensitivities, highlighting the need for comprehensive and politically feasible change.

Shares

The megatrend you simply cannot ignore

Markets are reassessing the impact of AI, with initial euphoria giving way to growing scepticism. This shift is evident in the performance of ASX-listed AI beneficiaries, creating potential opportunities.

Gold

Is this the real reason for gold's surge past $3,000?

Concerns over the US fiscal position seem to have overtaken geopolitics and interest rates as the biggest tailwind for gold prices. Even if a debt crisis doesn't seem likely, there could be more support on the way.

Exchange traded products

Is now the time to invest in small caps?

With further RBA rate cuts forecast this year, small caps may be key beneficiaries. There are quality small cap LICs and LITs trading at discounts to net assets, offering opportunities for astute investors.

Strategy

Welcome to the grey war

Forget speculation about a future US-China conflict - it's already happening. Through cyberwarfare and propaganda, China is waging a grey war designed to weaken democracies without firing a single shot.

Sponsors

Alliances

© 2025 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.