Legendary investor and mentor to many investing greats Benjamin Graham once aptly stated that: “investing is most intelligent when it is most businesslike.” Personally, I agree which is why I refer to what I personally adhere to and practice with my own investing as “business perspective investing.” Stated more directly, I do not believe in speculating in markets by attempting to guess (forecast) where stock prices may or may not go in the short run. Instead, I prefer positioning myself as a long-term oriented shareholder/owner of terrific businesses that I plan to be involved in (own) for many years to come.
Consequently, my personal approach might best be described as a long-term buy-and-hold strategy. Additionally, I believe in building common stock portfolios one company at a time with the primary objective of investing in high-quality at sound or attractive valuations. Since I personally prefer not to utilize index funds or what I call package products (mutual funds, ETF’s, CEF’s annuities, etc.) I am often automatically thrown into the active investor camp in contrast to the passive investor camp.
However, I do not consider investing in an index as passive, nor do I consider building your own portfolio as active. To my way of thinking, active versus passive would indicate the amount of trading that is done within a portfolio. With that said, I do believe it making changes to my portfolios from time to time if necessity dictates. On the other hand, I try to do this as little as possible on the notion that, as Warren Buffett once said: “inactivity strikes us as intelligent behavior.”
Furthermore, I do not consider investing in an index as necessarily passive. An index, just like my own personal portfolio, will from time to time add and subtract companies. Consequently, there is a level of activity within the various indices as well. Nevertheless, the primary reason I choose not to utilize so-called passive investments like an index is because as many regular readers would attest, I am extremely fastidious with valuation. With that said, I cannot bring myself to buy an index because I recognize that there will likely be many businesses within that index that are overvalued at any given point in time.
This leads me to a clarification regarding the title of this article. To clearly understand what I’m suggesting requires adding an additional qualifier to the original title. Instead of simply stating “Passive and Buy-And-Hold Investing Don’t Work Unless!”, I would add the qualifier – unless valuations are in alignment at time of purchase. This supports one of the guiding principles that I have long followed that states: “you make your money on the buy side.” I will be elaborating on this point later in the article.