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The Failure of Passive Investors! April 13, 2009

Posted by shaferfinancial in Finance, Uncategorized.
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“The rate of return sought should be dependent, rather, on the amount of intelligent effort the investor is willing and able to bring to bear on his task. The minimum return goes to our passive investor, who wants both safety and freedom from concern.  The maximum return will be realized by the alert and enterprising investor who exercises maximum intelligence and skill.”

Benjamin Graham in The Intelligent Investor

He continues, “In many cases there might be less real risk associated with buying a ‘bargain issue’ offering a chance of a large profit than with a conventional bond purchase yielding 4 1/2%.”

And from his student Warren Buffet we get these ideas:

“Wide diversification is only required when investors do not understand what they are doing.”

“Diversification is protection from ignorance. It makes very little sense for those who know what they are doing.”

“Why not invest your assets in companies you really like?  As Mae West said, ‘too much of a good thing can be wonderful.’ ”

So we see from these highly successful investors that passive investing has from the beginning been a failing strategy.  As Ben Graham instructs us, investing passively in mutual funds [which is what most people do], we should only expect meager returns [that is what the data tells us actually happens].  If we should only expect meager returns, then why expose ourselves to the market risk?

So, the data instructs us, as well as successful investors, on rule #2 for investing; If you want to invest in the equity markets you must become an active [intelligent] investor, otherwise take the conservative route and lower your expectations.

For those who missed rule #1; Build reserves or [financially] die!



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