Random Walk Theory

A theory that was enunciated and made famous by Burton Malkiel’s classic “A Random Walk Down Wall Street”. The author believes that stock prices are inherently random and that it is impossible to outperform market averages via stock selection.

Some random walk theorists may compare predicting stock prices to predicting how well a basketball player will perform. For example, if a player has a hot hand and scores successively, there is no actual correlation between that and future results, since each result is independent. However, this argument is fallacious as stock prices reflect change in business fundamentals in the long run. While the day-to-day change in price may be more or less random, trends do occur and are not discounted immediately by the market.

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