Professional investors dream about volatile markets

The Elements of Investing – Burton G. Malkiel, Charles D. Ellis

I have read Burton Malkiel’s classic ”A Random Walk Down Wall Street” before. Therefore I had high expectations for this book as well. I believe I should start with a warning.  ”The Elements of Investing” is indeed good, but for very different reasons.

Where ”A Random Walk Down Wall Street” is long, detailed and somewhat advanced, ”The Elements of Investing” is short, precise and clearly aimed for beginners in investing.

The book is divided into five chapters. They talk about saving, indexes, diversifying, avoiding blunders and about keeping it simple.

The saving is the backbone of your financial success. If you have nothing saved, you have nothing to invest. In this chapter the authors stress the importance of a sustainable lifestyle. In short, keep your costs lower than your earnings and you automatically accumulate money.

Both Burton Malkiel and Charles Ellis are strong supporters of the efficient market hypothesis. Therefore the book focuses mostly on the index investing. It walks you through the basics of the efficient market hypothesis and why the indexing is so effective.  In the last chapter you will also get some suggestions of possible indexes and EFTs to invest on.

The chapter on diversifying looks into reducing the risk through time and geography. Age long advice still holds true – do not put all your eggs in the same basket. Index investing offers you an easy way to diversify with low costs. And as an investor you should love the low costs.

Authors also outline the most common mistakes made by the investors. The chapter about avoiding blunders lists things like overconfidence, going along with the crowd and trying to time the market. We are all humans and therefore make mistakes. But by knowing the common ones gives you a change to pull ahead.

“The Elements of Investing” is really easy and fast to read. As one anonymous commenter in the web put it: ”This book could be a summary of Malkiel’s previous books”. This is a book I would happily suggest to anyone new to investing.

However even though the book is fairly basic, it can surprise you.

The idea behind the dollar cost averaging is to diversify in time aiming to buy more when the stocks are down and to buy less when the stocks are up. I have read about the concept several times before, but as usual had not really understood what it means.

The book did a magnificent job explaining it to me through an illustrative case (p. 63) in the chapter about diversifying. You aim to save and invest 1000€ per year for 5 years. Would you prefer volatile market or steadily rising market?


Year Amount invested Volatile market (price per share) Rising market (price per share)
1 1000€ 100€ 100€
2 1000€ 60€ 110€
3 1000€ 60€ 120€
4 1000€ 140€ 130€
5 1000€ 100€ 140€


Intuitively many of us would prefer the rising market. In the end the market is 40% up from where you started! That must be good, right?


In this case study the person who bought shares from the volatile market ended up with 60.48 shares worth 6 048 € (60.48 x 100€). The one who bought the shares from the rising market bought 42.25 shares worth 5 915€. That is a total of 14.5 % more in earnings.

Just like cars, you would like to buy stocks on sale. Volatile market gives you a chance to do this. This is something most of the people do not understand.

Professional investors are not interested about the stability and growing markets. They dream about volatility and market crashes, because that is where the BIG money is made. (Like a recent example of “the trader on the BBC” shows)

Whatever we might think about it, this is how the game is played. And if you understand it, you are already a step ahead of most of the players. This is the most important learning from ”The Elements of Investing” for me.

The book “The Elements of Investing” is available for example from and from

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