I’ve been wanting to talk about this topic, because many novice investors are constantly misled by the dream of “beating the market.” In fact, as early as 1973, economist Burton Malkiel—through his research—showed us a reality: stock price movements are random, and past price trends have no predictive value for the future. This is the core idea of the random walk theory.

Put simply, the random walk theory holds that stock price fluctuations are completely unpredictable, like a drunkard’s route—no one knows which direction the next step will take. The theory directly challenges the claim that technical analysis and fundamental analysis can help you beat the market. No matter how well you read candlestick charts or how well you analyze earnings reports, you can’t change the randomness of price movements.

Why is this theory important? Because it gave rise to the Efficient Market Hypothesis (EMH). Simply put, EMH states that all available information has already been reflected in stock prices, so whether you’re a retail investor or someone with insider access, you can’t consistently outperform the market. The weak-form EMH says that past price data is useless; the semi-strong form and the strong form EMH say that even public information and insider information are useless—prices have already fully reflected everything.

Of course, this theory also has critics. Some say the market isn’t always perfectly efficient, and that there are arbitrage opportunities. The existence of bubbles and crashes seems to suggest that price movements aren’t entirely random either. But in any case, the impact of random walk theory on modern investment thinking is profound.

So how do you use this theory to guide investing? The most straightforward approach is to give up on stock picking and market timing, and instead embrace passive investing. Rather than spending time researching individual stocks, it’s better to invest regularly in a low-cost index fund, such as the S&P 500. That way, you can earn the market’s average returns while lowering risk through diversification. Over the long run, sticking to this strategy’s returns often won’t be too bad.

From my observations, more and more investors are starting to accept the logic of random walk theory and are turning to index funds and ETFs. This isn’t because they’ve given up on the dream of making money, but because they’ve recognized that rather than being a failed active investor, it’s better to be a successful passive investor. Of course, this theory isn’t perfect—market complexity is far beyond theoretical models—but as an investment framework, random walk theory is indeed worth thinking about.