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Enterprising vs Passive Investor
Before anything, you have to think what your objective is towards your money. If your pretension is capital preservation and need the money in the short term, the stock market ain’t for you. This will dictate your capability of handling volatility with temporary loses in market value. If you conclude that you can handle volatility and don’t expect to be needing this money in the short term, then the approaches could be the following.
Benjamin Graham is one of the great thinkers and writers of the past century and, in his book “The Intelligent Investor”, he stated that you have to decide among being an Enterprising Investor or a Passive Investor. Those who stay in the middle are condemned to underperformance:
“You can’t expect to be half a businessman and expect half the return.”
Being an enterprising investor implies that you will be selecting the stocks you own. Many authors claim that one should select the companies the highest quality possible. You do so by exhaustive research, learning about their business model, financials, thesis, hearing the CEO, and so on. Once the due diligence is done, you proceed to decide what companies will integrate your portfolio and which size will each have.
If you follow this path, be sure that you have the will and the time this activity requires you to. The will is to continue the path you took for years to come, and the time is to learn the necessary insights to be capable of evaluating businesses quality and selecting them. If not, the market will punish you.
Being a passive investor means that you will be selecting ETFs or funds at the beginning of the journey and will be sticking with them for years to come. The SPX could be the selected ETF if the intention is to have exposure to the US largest companies. It is very important to stick with the same fund for a long period of time to not fall victim of market volatility.
If this is the path followed you have to do the exact opposite of your counterparty. You don’t have to care nor try to predict what the stock market will do. You have to completely detach because, if you do not, you will be in disadvantage against the enterprising investors and the market will punish you. This is easier said than done, there will be no excitement in this journey nor great accomplishments to share with friends.
So, in conclusion:
“If you are an aggressive investor, be sure to have the knowledge.
If you are a passive investor, be sure to resist the temptation to deviate.”