Legendary investor and author of “A Random Walk Down Wall Street” Burton Malkiel recently sat down with Marketwatch to give his thoughts on the rise of the day trader, the Fed’s actions since the pandemic roiled the stock market and whether passive investing has permanently put active investing out of business.
On the Rise of the Day Trader
First, he was asked about the rise of the “Robinhood investor” or day trader during the coronavirus lockdown. To this, Malkiel said it’s mostly a spillover effect from the lack of sports gambling. He said the leap from gambling to day-trading is a small one, but most likely unprofitable in the long run.
“I believe that for many of these people, it is a substitute for sports gambling. You know, in a way I am sympathetic. I don’t think there is anybody who devotes a life to studying and working on the stock market who doesn’t have something of a gambling instinct. I am the first to admit that I have gone to the horse races, I have sat at the tables at Las Vegas and Atlantic City, so I do not think there is anything wrong with gambling for entertainment. The problem that I see is that this is the diametric opposite to investing,” says Malkiel.
“For me, investing means buy and hold, as you said. The thesis of Random Walk was that you are much better off not buying individual stocks, but buying an index fund. To go and day trade and think that you are investing, that’s what I think is absolutely wrong and is likely to be simply disastrous for people. All the evidence is that day traders in general lose money. It’s not that they can’t make money in gambling, I’ve actually won from time to time. But over the long run, this is a losing proposition.”
Large Fund Managers
Malkiel says that the widely-held belief that the large fund managers are ruining the ability to actively manage a portfolio is false. He gave Vanguard, BlackRock, and State Street Global Advisors, that run passive index funds, as examples.
“There are plenty of active managers, hedge funds and private equity buying individual stocks. Indexing is not affecting valuations in the market. If there’s too much money going into Apple and Microsoft and some of the neglected stocks are really too cheap, believe me, money is going to go into those. There will always be people who think they can beat the market. This is a very well-paid business. People will say, buy our actively-managed fund or our hedge fund because we’re going to root out the real values. Indexing could be a lot larger and the market would still function just fine.”
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On the Role of the Fed
Malkiel was also asked about the large role the Federal Reserve has taken in the markets since the coronavirus pandemic started, and whether the belief that the Fed will always be there to backstop losses has permanently skewed the risk-reward ratio.
“I don’t think there’s any question about that,” Malkiel said. “A lot of people write about the disconnect between the real economy and the stock market because the stock market’s been going up and the real economy has been cratering. The answer is that the activities of not only the Federal Reserve but the European Central Bank, the Bank of Japan, they have been putting trillions of dollars of stimulus into the economy.”
“In terms of whether this is the right policy, I think given the unusual nature of this recession or, if you want to call it a depression, I don’t think the Federal Reserve had a choice. To prevent our economies from total collapse as the shutdown occurred, this was absolutely necessary to prevent even more suffering than we’re having now. But sure, it had a massive effect.”