Are You an Active or a Passive Investor?

If you have read the Intelligent Investor or other books by Ben Graham you will know the importance of knowing what kind of investor you are. Ben Graham also tells us that there is no mid-point; you can’t successfully be a semi active investor as this will more likely produce inferior results than if you were simply a passive investor.

In a very simplistic sense, active investors are those who aim to over perform the market indexes by spending a significant amount of their time doing Intelligent  “Security Analysis”, passive investors on the other hand are those of us that can’t or don’t have the time to individually analyze securities and thus prefer safety of principal and an average return.

I followed two simple rules of thumb to help me determine whether I had the time and could acquire the knowledge to become and active investor.

  • Do you have enough time and are you willing to read over and understand the annual reports of the companies you hold or will hold?
  • Active Investing is a full time job; can you dedicate a minimum of 6 – 8 hours daily towards investing?

If your answer is no to any of the previous questions then you should decide to follow a passive investment path. (These are only my opinions)

Being a passive investor does not mean you can’t enjoy the intellectual challenge of picking stocks and valuing companies, however you have to always remember that you are doing it for the challenge or for the fun itself and not in an straight investment basis, Ben Graham suggests allocating a small portion of your capital (< 10%) towards this kind of endeavors, think of it like going to a casino with the odds a bit in your favor.

What about capital allocation for Investment grade activities?

Ben Graham Suggests a simple 50 – 50 capital allocation distributed equally over stocks and bonds at most times. However he mentions that under certain favorable circumstances a 75 – 25 divisions might be justifiable e.g. buying more stocks after unjustifiable low prices following a recession.

Hope this helps some. I always considered I had enough time to analyze individual stocks but it proved to be extremely time consuming very rewarding Yes!, but also very time consuming and

Remember: you can’t be a semi – active investor! You can try 🙂

 

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