According to the author, the basic secret of investing is committing to stock investment in the long term or diversifying investments in case of short-term investments. The author justifies his assertions by using historical testimonies and expounding on them by using personal experiences. The book has four sections with respective chapters that elaborate on various concepts of investing. The book report will provide the author’s main idea and the insights gained. An analysis will show that Malkiel’s book offers an avenue that allows investors to make sound investment decisions by balancing their investment expectations with options available to them.

Part One: Stocks and their Value

This part entails the first four chapters that introduce the reader to the world of investments. The part mainly discusses concepts of asset valuation by using theoretical foundations. The author mainly uses the firm-foundation theory and the castle-in-the-air theory to expound on asset valuation.

The first chapter is “Firm Foundations and Castles in the Air” and it offers an introduction to investments. It explains that the firm foundation theory argues that an investor should make investments on the basis of the actual value of the proposed investment. The author uses a real-life example that a person wishing to invest in Coke should base the investment decision on the product’s parent company, the Coca-Cola Corporation. The castle-in-the-air theory asserts that an investor should make investments as a response to actions of the masses. For this reason, the theory argues that an investor usually makes more returns by following the majority who invests based on current trends or based on the foundations of a firm. The chapter concludes that both theories are right in different investment situations. The explanations of the author of the two theories offer a background for the author to critique them in the following chapters.

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The second chapter “The Madness of Crowds” explains historical financial occurrences that prove that actions of the masses have significant investment repercussions. Examples of such occurrences include the Tulip-Bulb Craze, the South Sea Bubble, and the tulipomania. In the three instances, the market expanded in a speedy way and led to the overvaluation of assets. After some time, values of the assets returned to their normal valuation after one or a couple of years. A graphical analysis of the three instances showed that by the end of the overvaluation hype the values of the assets returned to the same values as before the hype. The chapter portrays that investors who just follow the masses blindly tend to lose heavily in the market. The inability of investors to resist the urge of the masses makes them vulnerable to adversities of the market.

Chapter three explains the stock valuation between the 1960s and the 1990s. The chapter offers a continuation of the craze that the market experiences. The author uses various examples in the stock market to expound on the modern version of the extremity of markets. He expounds on the multiples of price earnings that formed the base of stock trading at the time. The author also expounds on the roles of underwriters in the issuance of new securities, especially their roles in misleading investors. The misleading happened despite investors having access to the guidelines offered by the United States Securities and Exchange Commission. For instance, the stocks in the 1980s were overvalued. The scenario confirms the assertion of the author in the second chapter that such situations continue to recur. Another example offered by the author is the obsession of investors with blue chip companies in the 1970s. By 1980, the values of the stocks had returned to their normal prices. The cases show how firms often manipulate information to increase their value so that they can attract investors. The author concludes that manipulation is inevitable because even though organizations such as the SEC provide the guidelines, they can do nothing to prevent investors from parting with their money. By offering real examples and enlightening historical occurrences, the author remains authoritative and ensures that the reader grasps the real impacts of the masses in making investment decisions.

Chapter four explains the internet bubble that sufficed in the late 1990s. The author argues that the public’s obsession with the internet was fuelled by other bubbles similar to the historical ones covered in the previous chapters. For instance, the au
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