According to Benjamin Graham, in order to avoid speculation, fundamental analysis must be applied in order to analyse the viability of a stock/bond before purchasing it.

Is this criteria valid for a market index? In other words, can a market index be treated as a single stock/bond (by aggregating al its underlying securities) with regards to its fundamental analysis?


In case the above is unpractical, is there any "fundamental analysis" specifically oriented to analyse market indexes?

5 Answers 5


In theory it is possible, but very impractical. So much so that it approaches the impossible. Also this does not make much sense.

Assuming that it takes 100 hours to do proper fundamental analysis on a company the DJIA would take 3000 hours, the S&P 50,000 hours. That seems like an impractical amount of time given the short estimate of 100 hours.

During the work you will find members of the average that do not meet your investment criteria. So why would you then invest in them (through buying the index)? If you are going to do all that work, just invest in the winners.

The whole point of index investing is to take the work out of "picking winners" and just buy the broader market. The freedom this gives is astounding and allows people to concentrate on their chosen profession. This tends to be very profitable as they can earn more at their God given talent, thereby giving them more to invest. It is an instance of concentrating on one's strength.

Edit: To call index investing speculation because of Graham's definition is just silly. Graham's definition was written 42 years prior to the creation of the first index fund. He was not omnipotent despite his wisdom. In fact index funds are less speculative then those that practice fundamental analysis, or so the research shows.

  • Comments are not for extended discussion; this conversation has been moved to chat.
    – JohnFx
    Mar 3, 2021 at 20:51

As Pete B. points out in his answer, doing an in-depths analysis is impractical. Moreover, according to the efficient market theory there is not much to gain by doing in-depth fundamental analysis as the market has already priced available information. On a whole index that is even more likely than on individual stocks as errors on one stock will be compensated by errors on another stock.

However, sometimes markets are not entirely rational and get carried away with psychology and castles in the air. There are some indicators that can help to spot such cases, for example P/E multiples. These can easily be aggregated automatically and be used as a sanity check. If an index has an extremely high P/E multiple it should better have a good explanation


I would say yes, you would do so by analyzing the market/country/economy.

Looking at the following:

  • economic variables
  • economic projections
  • Index valuation multiples (P/E, P/S, Free cash flow yield)
  • Index aggregate fundamental metrics (free cash flows, debt, capex, dividends,...)
  • index aggregate sales, operating profit, earnings (absolute and growth). You can even break it down by industry.
  • quick analysis on top constituents (S&P500 fangs represent 40%)
  • qualitative analysis on country including politics/economic.
  • index sector composition (US tech vs EU and UK is more exposed toward cyclical sectors).

However, note that you should base your analysis on a relative basis with other markets/regions.

This is how I base my asset allocation decisions. I analyze the markets from a top down perspective. By doing so, I would for instance, reduce/sell my US equity exposure and allocate towards EU and UK equities.

Doing classic fundamental analysis on all index constituents does not make sense because if you buy the index, company specific events and risks gets diversified away.


Absolutely you can. Here is one approach of valuing the equity markets of entire countries and computing an equity risk premium: Country Default Spreads and Risk Premiums by Aswath Damodaran. There are many important assumptions and rationalizations that go into the model Damodaran uses, see the linked paper for more info.

There are other more simplistic, quick-and-dirty measures of valuing a broad index such as the S&P500 - you can take the P/E of the entire index, or you could consider the Buffett Indicator, or the VIX (colloquially, the "fear gauge" for the S&P500)


Just to step back,

According to Benjamin Graham, in order to avoid speculation, fundamental analysis must be applied ...

You're presenting this as if it is a well-accepted general "scientific" line of thinking, and then asking a further question from there.

But unfortunately, the quote above is just a theory.

But wait - is it even a "theory"? Perhaps not even. If we asked some scientists from the hard sciences who use terms like theory, proposition, proof etc professionally to read the book, they'd likely describe it as an "idea" or perhaps .. "a book"!

If one is cynical, the phrase "value investing" is nothing more than a catchy phrase.

Some observations:

  • Overwhelmingly, counting by volume, most trades today are done by HFT or quant systems. Consider that these systems have absolutely no connection - nothing, none, nada - to "fundamental" analysis.

  • After being touted for decades as the epitome of "fundamental" trading, Warren Buffet lost, is it 100 billion now? He's now often seen as a guy who basically made one really lucky really big trade (on "insurance industry") at the right time.

  • Regarding Graham, it's far from a lock whether his system works (google up articles )

  • Nobody has the slightest clue at the base level "why person X buys stock Y". The notion that stock prices have something to do with earnings is - just another idea. Recall that the entire thing that analyst departments do is incredibly careful investigate numbers and then .. guess future numbers and then .. make-up out ot whole cloth a "multiplier" .. and that's the price. (During say the social medias boom, they randomly said, oh, the multiplier is different for them.) Many thinkers on the matter wave their hands and say it's all "game theory", herd reinforcement, others trade only really based on "velocity", and so on.

  • There is the endless war between "technical" traders and "fundamentals" traders; the fact is that many, perhaps a bigger fraction, of "day - trader" type traders who just sit there and make a living from it lean towards "technical" rather than "fundamental" thinking - and then there are many who think both are silly.

But then, index investing is inherently speculative isn't it?

The answer is yes - of course - correct - 100%.

You can make it even simpler!

But then, investing is inherently speculative isn't it?

Again the answer is yes - of course - correct - 100%.

It does seem to be that about the best you can do is "set and forget" with "major indices". Stock Picking Doesn't Work.

So - "set and forget" with "major indices". But then ....... everyone immediately and correctly mentions the ultra disaster of the Japanese markets where the major index slumped for 20 or 30 years.

The big slump in the S&P which started a couple weeks ago, it was on the lunar new year right, the 12th? Say that goes on for 30 years. So we finally pass 3900 on, say, Wednesday, May 17, 2051. So, if you're under say 25 years old currently, that's fine and it won't affect you, and when you're 70 you'll be saying "that sure was a long slump back then!" If you're over about 30 years old currently, you're screwed.

Another example sometimes given is the nifty fity, which was "the!" way to value invest back in that era and "everyone knew!" it was the epitome of a correct fundamental approach, etc, and they are now mainly evaporated.

You are seeking a distinction between "investing" and "speculating", between "investing" and "trading" - I fear that none exists.

You then have the question of what the hell is the, or a, "major index" of the whole world economy? A reasonable and the usual answer is just that it's the S&P, since it sort of generally captures the whole world economy. But who knows?

  • I agree that there is no such thing as non-speculative investing. Mar 1, 2021 at 19:49

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