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An Investing Classic

Forget what you see on CNBC. Random Walk remains the ultimate reality check.

All investors should read A Random Walk Down Wall Street every now and then. It's a welcome antidote to fads, hype and the commentary of Wall Street's talking heads -- basically, most of what is on CNBC. This classic's latest edition (the ninth since it was first published in 1973) features chapters on two new topics, one of which challenges the book's core philosophy.

A Random Walk (Norton, $30) argues that no investing system can consistently beat the market. That's because, says author Burton Malkiel, a Princeton professor, the future is just too unpredictable -- a random walk -- to allow market-beating returns. Both technical analysis and fundamental analysis are worthless, he says, and mutual fund managers add no value. "Investors have done no better with the average mutual fund than they could have done with a broad stock index," he writes. Malkiel earned his Street cred when the book's 1999 edition correctly recognized the tech bubble for what it was -- a disaster in the making.

In the new edition, Malkiel weighs in on life-cycle investing and behavioral finance. Life-cycle funds become more conservative as you near retirement. The author likes them, even though most don't follow his strict indexing philosophy. Behavioral finance is a relatively new field that postulates that our brains are wired to make bad investment calls. In theory, money managers should be able to use behavioral-finance research to beat the market, a notion that Malkiel doesn't challenge persuasively.

As with past editions, Malkiel admits -- barely -- that some investing methods may defy the random walk. He allows, for example, that buying beaten-down stocks may be a way to beat the market. He also concedes that stocks of small companies outpace big-company stocks, although they are more volatile.

If you're patient and don't let emotions interfere, you may be able to beat the market by investing in small-company and undervalued stocks. But Malkiel's skepticism about everything else makes A Random Walk the ultimate reality check.