“But no one was able accurately to identify the timing of the bubble in advance. In fact, there is substantial evidence that both individual and institutional investors who try to time the market invariably do the wrong thing. They buy at market tops when optimism reigns, and they sell at market bottoms when pessimism is rampant. And while some investors made excess returns over certain periods by making judgments that were more accurate than the market consensus, such profits did not represent unexploited arbitrage possibilities for riskless extraordinary returns.”

The main premise of Malkiel’s argument, here, is that attempts to predict the behavior of the market are never entirely accurate. While some investors may make a correct gamble on a stock or series of stocks, they do not represent an obvious or guaranteed opportunity that other investors should have taken. Even experienced professionals are prone to the mistakes that lead to significant losses, and the only safe way to invest is minimizing risk for long-term returns.

“During many occasions over the last 45-year period, it looked like the end of the world as we knew it. In 1987, the stock market lost 20 percent of its value in a single day. When the dot.com bubble burst in 2000, some of the best-known growth companies lost most of their value. Apple fell by more than 80 percent, and Amazon lost more than 90 percent of its value. During the financial crisis of 2007-2008, obituaries were written about the capitalist system itself. And as the COVID-19 pandemic worsened in 2020, many press reports assured us that the world had fundamentally and irreparably changed. But enough of all this. The important point is that an investor saving $100 a month and putting it into an equity mutual fund became a millionaire.”

The examples Malkiel provides in this passage illustrate the lows the market can reach in times of crisis. However, his comment at the end of the passage asserts the soundness of long-term, balanced investing, in which the investor saving $100 a month in an equity mutual fund survives the catastrophes by avoiding the pitfalls of greed and crowd psychology.

“It was his opinion that professional investors prefer to devote their energies not to estimating intrinsic values, but rather to analyzing how the crowd of investors is likely to behave in the future and how during periods of optimism they tend to build their hopes into castles in the air. The successful investor tries to beat the gun by estimating what investment situations are most susceptible to public castle-building and then buying before the crowd.”

Keynes’s idea of castles in the air capitalizes on crowd psychology, while firm-foundation theory rests on an equilibrium reached over time. Essentially, Keynes’s method only works in short-term buying and selling, in which a new issue might be overpriced shortly after the IPO, and investors who buy an initial offering can sell at a higher price for a profit. However, if an investor buys too late, they risk selling at the lower price following a crash, making the investment risky.