The Investing Legend Who Endorsed Index Funds

When you think of Benjamin Graham, the author of the 1949 classic , you probably think of value investing—the meticulous art of finding bargain stocks. But what many don't realize is that Graham had a very different message for the vast majority of people, one that feels surprisingly modern and is essential for anyone interested in .

Graham believed that investors fall into two camps: “aggressive” and “defensive.” He argued that to be an aggressive investor, you need to treat it like a business, armed with deep knowledge and mental fortitude. For everyone else—which he believed was most of us—the defensive path was the only logical choice. Why? Because most people simply don’t have the time, determination, or specific skillset to succeed at picking individual stocks. He urged them to accept a reasonably good return and resist the temptation to chase something more.

Even though the first index fund wouldn't appear for another 25 years, Graham's description of a defensive strategy was a blueprint for it. He essentially advocated for an approach that would later become a cornerstone of .

A Skeptic of Wall Street

Initially, Graham suggested that defensive investors could turn to professional advisors who were “careful, conservative, and competent.” He didn't promise brilliance, just a steady hand that could shield clients from costly mistakes. This advice was rooted in his deep-seated skepticism of the financial industry.

He pulled no punches when describing Wall Street, calling it a “Falstaffian joke” and a “huge laundry” where institutions just trade blocks of stock with each other. He pointed out the obvious conflict of interest: Wall Street is in the business of generating commissions, not necessarily making its customers wealthy. This is a crucial concept for anyone starting out with to understand.

At first, Graham saw the mutual funds of his time as a decent option. They offered diversification and, on average, their performance was just about able to cover their expenses, roughly matching the market. But as the decades wore on, his view soured.

By the 1970s, he watched the rise of “performance funds” during the Go-Go era of the 1960s. These funds, run by a “new breed” of managers, promised miracles but ultimately delivered “calamitous losses.” He could have just as easily been describing the tech-focused funds of the late 1990s that imploded after a spectacular run-up. This cyclical failure reinforced his belief that a simple, steady approach to was far superior.

The Real Way to Make Money

Graham’s core message has always been timeless: the real money in investing isn't made from clever buying and selling. It’s made from owning and holding quality securities, collecting dividends, and benefiting from long-term growth. This is the heart of building wealth through .

So, wouldn't a fund that buys the entire market and holds it forever be the perfect vehicle for his philosophy? When he advised investors to “emphasize diversification more than individual selection,” he was describing the modern index fund in everything but name. His principles of were perfectly aligned with this yet-to-be-invented product.

Graham’s Final Word on the Matter

Late in his life, in a 1976 interview, Graham was asked directly if the average manager could beat the market averages. His response was a blunt “No.” He explained that it was a logical contradiction for experts as a whole to beat themselves. This is a key insight for those learning .

When asked if investors should be content with earning the market’s return, he gave an equally direct “Yes.” He saw no reason for people to accept results inferior to an index fund while paying high fees for the privilege. He even admitted that his own specialty—detailed security analysis—was no longer the rewarding activity it once was. The sheer volume of research being conducted made it nearly impossible for anyone to consistently find an edge.

So, what's the takeaway from one of the greatest minds in finance? Achieving satisfactory results from is easier than most people think. You don’t need to chase superior returns by taking on extra risk or paying excessive costs, especially when a simple, low-cost index fund allows you to capture your fair share of the market's growth.

And if there’s any doubt, just listen to his most famous student, Warren Buffett, who personally confirmed Graham’s stance. In 2006, Buffett stated: “A low-cost index fund is the most sensible equity investment for the great majority of investors. My mentor, Ben Graham, took this position many years ago, and everything I have seen since convinces me of its truth.”