Would Benjamin Graham, the man known as “the father of value investing” and a pioneer in security analysis, have liked plain, generic index funds? In a recent column, Jason Zweig, who edited an updated edition of Graham’s classic book The Intelligent Investor, says yes.
“Graham liked to distinguish between two types of investors: ‘defensive’ and ‘enterprising,'” Zweig wrote on The Wall Street Journal’s “Total Return” blog. “They were defined not by how aggressively they pursued risk, but rather by how much time and effort they were willing or able to put into investing. Defensive investors lack the inclination and interest to expend the energy it takes to try beating the market. The terms ‘defensive’ and ‘enterprising’ can apply equally to individual and professional investors.”
For enterprising investors, “analyzing individual stocks and bonds can still pay off,” Zweig says, while for defensive investors, “index funds make perfect sense — as Benjamin Graham was among the first to point out, and as he never tired of saying.”
Zweig points to several comments Graham made throughout his career about index-type investing. For example, in the 1951 edition of Security Analysis, Graham and David Dodd wrote:
Stockholders as a whole must prosper or suffer with the rise and fall of corporations as a whole….An unabashed cross-section approach appears too simple to be sound, and it reduces the role of security analysis to a minimum. We suggest that the student should not dismiss it too contemptuously. It is by no means certain that the analyst will get better results from the type of selectivity most favored in Wall Street— viz., picking out the industries or individual companies that are likely to make the best comparative showing in the near future…. If we could assume that price of each of the leading issues already reflects the expectable developments of the next year or two, then a random selection should work out as well as one confined to those with the best near-term outlook.
Validea’s Benjamin Graham-inspired portfolio is up 12.5% annualized since its mid-2003 inception vs. 6.5% for the S&P 500. Check out its holdings here.