[Updated links to the cheaper paperback edition after it came out.]
This is a classic book, first published in 1973. The 9th edition just came out this year. You can browse its table of contents through Amazon Online Reader.
Every investor, whether you believe in market efficiency or not, should read this book at least once. This book does a very good job reconciling between market efficiency and perceived inefficiencies such as bubbles at different times. The author believes in a weak form of efficient market theory. Simply put, the market may not be perfectly efficient at all times, but it’s efficient enough to make it very difficult and costly trying to beat it. In the end, an investor is better off holding a market index fund that invests in everything under the sun. It’s not worth the cost and effort trying to invest in the undervalued stocks or high-growth mutual funds.
The book begins with two basic stock valuation models — Firm Foundations and Castles in the Air. Firm Foundations says a stock’s value depends on the company’s fundamentals — its business, profitability, growth, etc. Castles in the Air says a stock is worth whatever the next investor is willing to pay. It goes on with a review of bubbles and manias throughout history, from more ancient history — tulip craze in the Netherlands, the South Sea bubble in England, the 1929 Great Crash in the U.S. — to the stock market anomalies from the 1960s, 1970s, all the way to the late 1990s dot com bubble. The book then introduces two basic camps of stock valuation analysis: Technical Analysis and Fundamental Analysis. It shows how both Technical Analysis and Fundamental Analysis fail to identify outstanding investment opportunities more than what an efficient market already provides. Not that you can’t make money with Technical Analysis and/or Fundamental Analysis, but you can’t make more money than what you already can with investing in a market index fund after you take risk and cost into consideration.
The chapter on behavioral finance is new for the 9th edition. It reviews how investors often become their own worst enemy when it comes to investing. The book Why Smart People Make Big Money Mistakes And How To Correct Them covers this area in more details.
The final section of this book is the practical part. It gives advice on insurance, tax deferred accounts, saving for college, different vehicles for cash reserves, bonds, real estate, and stock mutual funds. Finally the book lists specific portfolio and fund recommendations for people in different stages of their lives.
Overall, this is a great book, a must read for every investor. It is however a little long which requires some patience because it explains everything in details. If you want to cut to the chase and prefer a cookbook approach, I recommend the shorter book The Random Walk Guide to Investing by the same author [update: see review]. The basic premises are the same in both books. The shorter The Random Walk Guide to Investing condenses everything into three basic points and ten rules in 200 pages in a small paperback. The full book A Random Walk Down Wall Street is about 400 pages.
Rating: ***** (Excellent). Highly recommended.