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I think you're taking quite an extreme interpretation of Graham's/Buffet's thoughts on index investing. It's a given that, with index investing, your returns wi
by cloudkj 16y ago
I think you're taking quite an extreme interpretation of Graham's/Buffet's thoughts on index investing. It's a given that, with index investing, your returns will match the market. Index investing isn't aimed at getting higher returns. Rather, Graham actually spends more time discussing and differentiating between different classes of investors.
For the "enterprising investor", s/he can afford to spend more time to find undervalued stocks and possibly outperform the market. For the "passive investor", to paraphrase Graham, it is good enough to simply invest in a representative set of securities, such as an index.
In fact, if I remember my Intelligent Investor correctly, there are various passages where Graham actually admits to the EMH being somewhat inevitable. Note that there are different variants/degrees of the EMH, and Graham probably subscribes to the weak or semi-strong versions.
Nonetheless, the point is that a belief in the EMH is not mutually exclusive with value investing. It depends a little on the extent to which you believe the market is efficient, and a lot on how much work you're willing to put into it.
- rsepassi 16y agoI did not intend to portray extreme views, and I believe that I've represented their views fairly. Buffett recommends index investing, but also believes that it provides great opportunity for the enterprising investor because of its passivity and ignorance of security values. Graham did indeed differentiate between the "enterprising" and "defensive" investor, but did not recommend an index approach to investing, even for the defensive investor, as he specifically recommends that no security should be bought at a price over 20x its earnings (Ch. 5). Graham recognized that the "defensive" or passive investor does not have the time, energy, or expertise necessary to engage in rigorous security selection, but ignorance does not protect an investor from risk - risk here being defined as risk of permanent capital impairment, which is the risk of overpaying for a security. My basic point is that every investor, passive or active, must protect him or herself against the risk of overpaying. Passive index investing does not protect you from this risk, and is therefore very dangerous. Fully agreed that good investing is pretty much totally dependent on how much work and emotional discipline you're willing to put into it.
- wisty 16y agoI'm not sure that "risk" is the right word. "Risk" should account for both the probablility of loss, and the magnitude of the consequences. You might overpay a bit, but not too much, so the risk is small.=