Investing has never been easier, yet more complex than today. Anyone can open an account, deposit money, and be “investing” in minutes.
But the instant that happens, they’re inundated with choices: risk tolerance, strategies, asset classes, factors, thousands of stocks, and even more funds. It makes you yearn for simplicity.
Ben Graham kept things simple. A lot of that had to do with the lack of available choices at the time.
He kept the investor classifications to a minimum. There were speculators and there were investors. And among investors, there were enterprising or defensive. The difference between the two depended on the amount of time and effort you wanted to put into investing. That was it.
Graham believed that anyone could learn to be a good investor and get “optimal results”. He also knew that most wouldn’t bother. So Graham kept his advice just as simple for those who chose the less intensive or defensive path.
In an interview sixty years ago, he suggested there’s nothing wrong with average results and to start with a simple plan:
The next best thing for him to do is to decide that he cannot expect to get optimum investment results without this optimum preparation, and consequently he has to accept a more representative or average investment program. He can do that by deciding to follow a simple but very definite plan — first by dividing his money into the compartments we discussed before, and, secondly, following a systematic and simple procedure with respect to the common-stock components.
The “compartments” was nothing more than owning U.S. government bonds and common stocks:
If you have a fair amount of your money in the Government-bond area and another fair amount in common stocks, you’re in an ideal position.
And the stock portion can be in an index of stocks:
…make up a list of good, representative securities, of the kind that are in the Dow-Jones industrial average, and he would probably do about as well with these as he would in trying to use a rather inexpert way of picking out the things that seem to be good to him from year to year or day to day.
You know, people say there’s no point in comparing things with the averages because you don’t buy the averages. And I’ve always added: Why not? There’s no particular reason why a person couldn’t buy 10 shares or 100 shares of all the stocks in the Dow-Jones averages and actually get their results. People don’t do it, for one reason or another, but there’s nothing impossible or unsound about it.
Then dollar cost average:
I suggest that he buy investment-company shares on a regular basis. That brings in the comcept of dollar averaging, which has now become so familiar and popular. That would be a sound procedure. The main thing for him is not to go off suddenly on a tangent, believing that he had suddenly become an expert because the market has gone up and he has been making some money.
Dollar averaging is a method of investmetn under which you set aside regularly a fixed amount of money and invest it in common stocks generally, either in a simgle common stock or preferably in a group investment through investment-company shares. By investing the same amount of money at regular intervals — say, every three months — you get two advantages. One is that over the years your investment reflects the average market price rather than the high market levels — which is where you are likely to buy if you follow the crowd.
Secondly, the arithmetic of dollar averaging gives you more shares at the lower prices than at the higher prices, so that your avearge cost is lower than the arithmetical average.
What’s interesting to me is how Graham’s advice is still used today, yet the complexity has grown – not all in a bad way – with the times. Having more choices than we had in 1955 is a good thing. International funds and low-cost index funds are at the top of the list (and probably where it ends).
But having more choices doesn’t necessarily mean you should make more choices. Making fewer choices is a proven strategy too which Graham, Buffett, Bogle, and others have repeated constantly. Yet, complexity still rules the day.
There’s a lot to be said for keeping things simple.
Interview with Benjamin Graham: Expert on Investments – U.S. News & World Report