What was Benjamin Graham's view on Mutual Funds?

Okay, let's talk about Benjamin Graham, the "Father of Value Investing," and his views on mutual funds.

Imagine him as an experienced, slightly nagging but incredibly wise old carpenter, and mutual funds are just one tool in his toolbox. He wouldn't simply say the tool is "good" or "bad." Instead, he'd tell you who should use it, when to use it, and how to use it.

In general, Graham's attitude towards mutual funds was one of conditional approval, but accompanied by strong vigilance. We can break it down into several layers:

I. Why would he "approve" of mutual funds? (Advantages)

1. A convenient tool tailor-made for "defensive investors"

Graham categorized investors into two types:

Defensive investors: They seek convenience, safety, and avoiding large losses, and are unwilling to spend a lot of time researching company financials. For these people, picking individual stocks is like asking them to build a house themselves—too difficult and too risky.
Enterprising investors: They are willing and able to spend time and effort researching and finding undervalued "bargains."

Mutual funds, especially those with diverse holdings, are practically tailor-made for "defensive investors." Their biggest advantage is that they single-handedly solve the problem of diversification. When you buy into a fund, it's equivalent to buying shares in dozens or even hundreds of companies simultaneously, greatly reducing the risk of "putting all your eggs in one basket."

For ordinary people who don't want to bother with research, Graham believed that buying into a reputable, broadly diversified fund was a perfectly reasonable and wise choice.

2. Theoretical professional management

Mutual funds are managed by "professionals" like fund managers, who do the research and make the decisions for you. Theoretically, this saves you a lot of trouble. Graham acknowledged this, but he harbored significant doubts about the actual capabilities of these "professionals" (as will be discussed below).

II. Why would he be "wary" of mutual funds? (Disadvantages)

This is the essence of Graham's thinking, and something he would repeatedly remind you of. His wariness primarily stemmed from the following two points:

1. Fees! Fees! And more fees! — The number one enemy of investment returns

You can imagine fund management fees, custodianship fees, and various other charges as small holes in a water pipe. Even if the flow of water is strong, with too many holes, less water will reach your cup.

Graham was extremely sensitive to costs. He believed that the primary principle of investing was "not to lose money." And fund fees are a certain "loss." Regardless of whether the fund makes money or loses money in a given year, you still have to pay the management fees.

Many actively managed funds have annual fee rates of 1%-2% or even higher. This might seem small, but over decades of investing, the compounding effect allows these fees to snowball, eating away at a huge amount of your potential returns. Graham would tell you that controlling costs is one of the few things you, as an investor, can fully control, and it must never be overlooked.

2. Mediocre performance — "Professional" does not equal "superior"

Graham, with ample data and facts, revealed a brutal truth: the vast majority of actively managed funds, after deducting fees, consistently fail to beat the market average (e.g., the CSI 300 Index) in the long run.

Fund managers are also ordinary people; they too chase trends and panic sell, and are influenced by market sentiment. Their so-called "professionalism" is often just following the crowd, or engaging in frequent, high-cost, yet ineffective trading. You pay a high price (high management fees) to hire a "chef," only to find that the dish they prepare is not as good as what you could make yourself using the simplest recipe (a market index). This is clearly not cost-effective.

Graham had a deep distrust of "star fund managers" who attempted to time the market and trade frequently. He considered it akin to gambling and inconsistent with the principles of "intelligent investing."

Conclusion: If Graham were alive today, what would he say?

In Graham's time, index funds were not as prevalent as they are today. However, the philosophy behind index funds perfectly aligns with all of Graham's requirements.

So, if he were giving you advice today, it would likely be something like this:

"For the vast majority of ordinary people (defensive investors), the best choice is to buy low-cost index funds."

Why?

Solves the diversification problem: √ (Buying a CSI 300 index fund is like buying into 300 of China's most representative companies.)
Solves the cost problem: √ (Index fund management fees are extremely low, often a fraction or even a tenth of those of actively managed funds.)
Solves the performance problem: √ (You give up the illusion of "beating the market" and steadily achieve the market's average return, which already outperforms most fund investors who've paid dearly.)

To summarize Graham's views on mutual funds, it's like a wise elder advising you:

"My child, funds are a usable tool; they can save you effort and diversify risk. But be sure to open your eyes and see their price tag (fees)! Don't be fooled by flashy promotions and so-called 'star managers.' For most of us, the simplest, cheapest, and most reliable kind (index funds) is truly the best tool to preserve and grow your wealth."