Random walk
The random walk idea says short-term price moves are unpredictable, like a series of coin flips, so a portfolio picked at random can do about as well as one picked by experts, and most investors are better off owning the whole market cheaply.
🌍 In the real world
Eugene Fama tested it in 1965 and found that past price changes said almost nothing about the next ones. In 1973 Burton Malkiel's book A Random Walk Down Wall Street made it famous with one line: a blindfolded monkey throwing darts at the stock listings could pick a portfolio that would do just as well as one carefully chosen by experts.
The Wall Street Journal put that to the test from 1988 to 2002 in its Dartboard contest: staff threw darts at the stock pages and professionals picked their own stocks. The pros won more often than the darts, but studies found much of their edge came from the publicity of being printed in the paper, which pushed their picks up for a few days, and from choosing riskier stocks.
The bigger evidence is in fund results. S&P Dow Jones Indices' SPIVA reports compare actively managed funds with their index twice a year, and over 10 to 15 years the large majority of US stock funds trail it after fees. That's the main argument for low-cost index funds, though a random walk doesn't mean prices are always right: bubbles and crashes happen, and nobody can reliably time them.
Example
Five people are picked by a goat at random and $1,000 goes on each. After a week they're up 2%. The whole market, weighted by size, is up 1.5%, and a careful stock picker is up 1%. One week proves nothing either way: over many weeks, random picks and the market tend to end up close, and costs decide most of the gap.
🎮 In Journey Shares
Every week a goat headbutts a board and picks five people at random. The goat race shows its picks against the whole market (weighted by market cap, like an index fund) and the week's top players, with an all-time tally of who wins. →
🧭 How to use it
Before paying for stock tips or a fund with high fees, ask whether it has beaten a cheap index over ten years or more, after costs. Most don't.
Treat one great week as noise. Judge a strategy over many weeks, the way the goat race keeps an all-time tally.
If you enjoy picking, keep it to a small slice and put the core of your money in broad, low-cost index funds.
🎮 Learn Random walk the fun way
Try it in a live 3D city with play money: trade shares in real public figures, get margin-called, pay your taxes and rob a bot or two. Free, and nothing real is at stake.
❓ Common questions
Did a monkey really beat the experts?
The monkey was a figure of speech in Malkiel's book. The Wall Street Journal's Dartboard contest used darts thrown by staff instead, and the pros won more contests, but much of their edge came from publicity and taking more risk.
If prices are a random walk, why do some investors get rich?
With millions of investors, some will have great records by chance alone. A few may have real skill, but it's very hard to tell skill from luck in advance.
Is the random walk the same as the efficient market hypothesis?
They're close cousins. The random walk is about price changes being unpredictable; the efficient market hypothesis explains why: prices already reflect what's known, so only new, unpredictable news moves them.
What is SPIVA?
The S&P Indices Versus Active scorecards, published by S&P Dow Jones Indices since 2002, which count how many active funds beat their benchmark index over 1, 3, 5, 10 and 15 years.
📚 Sources
- Fama, E. F. (1965). Random Walks in Stock Market Prices. Financial Analysts Journal 21(5): 55–59.
- Malkiel, B. G. (1973). A Random Walk Down Wall Street. W. W. Norton.
- Metcalf, G. E. and Malkiel, B. G. (1994). The Wall Street Journal contests: the experts, the darts, and the efficient market hypothesis. Applied Financial Economics 4(5): 371–374.
- Liang, B. (1999). Price Pressure: Evidence from the “Dartboard” Column. The Journal of Business 72(1): 119–134.
- S&P Dow Jones Indices. SPIVA U.S. Scorecard (published twice a year).
📜 Where it came from
🧩 Quick check
Which term is this?
“An ____ is a fund that buys every stock in a market index, such as the S&P 500, in the same proportions, so it matches the market's return instead of trying to beat it.”
🔗 Related terms
- Efficient market hypothesis: The efficient market hypothesis says stock prices already reflect all available information, so no one can consistently beat the market except by luck or by taking more risk.
- Index fund: An index fund is a fund that buys every stock in a market index, such as the S&P 500, in the same proportions, so it matches the market's return instead of trying to beat it.
- Expense ratio: The expense ratio is the yearly fee a fund charges, as a percentage of the money you have in it.
- Diversification: Diversification is spreading money across many different investments so a loss on one has less effect on the whole portfolio.
- Volatility: Volatility measures how much and how quickly a price moves up and down, usually as the annualized standard deviation of its returns.
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Categories: Funds and investing
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