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From Benjamin Graham in 1972: “Any approach to moneymaking in the stock market which can be easily described and followed by a lot of people is by its terms too simple and too easy to last.”
Why wouldn’t this apply to indexing?
In a 1976 interview, shortly before his death, Graham expressed the view that the situation for security analysis had “changed a great deal” since his textbook Graham and Dodd was first published. He noted that due to the enormous amount of research being done, he doubted most extensive efforts to find undervalued issues would generate sufficiently superior selections to justify their cost.
His final recommendation for the “defensive” investor (someone without the time, inclination, or expertise to perform in-depth analysis) was a simplified approach, which he essentially described as owning a broad cross-section of high-quality, established domestic stocks, akin to an index fund. In that interview, he stated:
“In effect that would mean that the stock market experts as a whole could beat themselves—a logical contradiction… I see no reason why they should be content with results inferior to those of an indexed fund or pay standard fees for such inferior results”.
Because indexing scales, it’s low cost, and if you dollar cost average over decades you ride the powerful math of accumulation and compounding.
Graham was describing why he had to revise the guidance he gave for security selection in each edition of Security Analysis, a book which had nothing to do with indexing.
Here is a August 2025 research report from Vanguard about index investing. It talks about the benefits and the myths.
https://corporate.vanguard.com/content/dam/corp/research/pdf/setting_the_record_straight_the_truths_about_index_fund_investing.pdf
Indexing only seems simple today because technology has made it effortless. Fifty years ago, building and maintaining a 500-stock portfolio, rebalancing it, tracking corporate actions, and doing it all at nearly zero cost would have been impossible for a retail investor.
It’s like comparing a 1970s Formula 1 car to a 2025 F1 machine. The driver isn’t necessarily faster—the technology is. The modern car does things that were simply not achievable with the tools of the past.
Indexing isn’t a hack. It’s a technology-enabled access point.
While Buffett still recommends that everyone read Graham’s “Intelligent Investor”, he suggests ordinary people would be better off investing regularly over the long term in the S&P 500 index via a low cost mutual fund. I think he meant this was a better method than amateurs doing their own stock picking. (I wonder what his views are on indexing more broadly). I have never read him suggest people ought to buy Berkshire. I read between the lines, and started buying his class B shares over time soon after they became available.
Many writers have zeroed in on the instructions in his will, advising his wife, should she survive him to invest 90% in the S&P 500 and 10% in treasury bills. This has been analyzed endlessly, yet most seem to have overlooked a couple points. First, his wife is elderly too. And, 10% of a vast sum placed in treasurys will likely outlive her. He never suggested anyone else should try this.
Graham wrote that one’s stock allocation ought to range between 25% and 75%, with the balance in bonds depending on whether prices are high or low, implying 50% if prices are “normal”. He never qualified this advice depending on the investor’s age or whether he was still working or retired.
I’m curious what Buffett thinks Graham would say today about his allocation advice, and if we substituted a mutual fund based on the Total US Index or even better, Total World Index (such as Vanguard’s VT) for stocks, and used short-term treasurys(individual or a fund) for bonds. Would he still only consider valuations, without regard to age of the investor or where the investor is in his life cycle? And more interestingly, what Buffett himself would advise.
I won’t pretend to understand the context in which Graham made this remark. But given that the first available index fund launched in 1976 and then took many years to prove it’s worth, it would be interesting (if he was still with us) to hear Graham’s take today.
More generally, I have found the resistance to index funds in some parts of the financial media puzzling and a little frustrating. I think that this has lessened considerably in recent years, and I can see why. It’s hard to argue with the numbers. Index investing has simply been a very good way for people to invest for their future.
From https://www.cnbc.com/2025/09/05/active-funds-struggle-to-beat-index-funds.html
Just 14% of actively managed U.S. large-cap funds have beaten the S&P 500 over the past 10 years, according to SPIVA.
The one big caveat is that some level of active investing is necessary for price discovery. It will be interesting to see how that plays out over coming years and decades.
When Benjamin Graham made the revision to his book “the Intelligent Investor” in 1972, passive index investing did not exist (not until Vanguard introduced it in 1976). Graham advocated for fundamental value investing using security analysis and margin of safety. Warren Buffet, a Graham’s student, anchored his investing approach on those principles, and Berkshire Hathaway has outperformed passive index investing since its inception.
It may be unfair to judge Graham’s investing principles through the lens of modern index investing, given how profoundly the market has evolved since his time.
I certainly don’t know exactly the context Graham was considering when he made that statement, but I suspect one (possible) aspect is that anything that’s useful will be less useful if everyone knows it and practices it. For example, early on Bogle himself said chaos would result if 50% of the stock market was index investors. Bogle later revised it to 70%. Clearly, if 100% of investing was index based there’d be no market price setting and the system would fail to efficiently allocate capital to the more deserving companies. So reflecting on Grahams statement, any advantage in the stock market (including even index investing) really only lasts as long as everyone isn’t using it. In the case of index investing, I suspect it does apply to index investing but I doubt that day is anytime soon. Just my 2 cents. Gene
Graham was essentially a value investor, he was talking from that mindset of actively looking for sound businesses with lower valuations than the fundamentals suggested. Basically exploiting inefficiency in the market to eventually capture a gain. Index investing is dramatically different, capturing the whole market to earn the average return. His approach needed knowledge and ability to discover value; if everyone understood and could perform this difficult feat, the advantage of doing so would disappear. Indexing doesn’t require this information advantage. The statement is, in effect, comparing apples to oranges.
It would appear that given that was written fifty years ago, it has easily been disproved.