For many beginners, deciding whether to go the active route or the passive route when it comes to making investing decisions can be difficult. If you listen to Warren Buffett, you’ll go the passive route. In fact, Buffett once said:
“Passive investment in aggregate is going to beat active investment because of fees.”
That’s about as clear of an answer as we can ask for from an investor who’s believed by many to be the best who ever lived. However, what do the other gurus say?
Charlie Munger (Trades, Portfolio) agrees with Warren Buffett
Charlie Munger (Trades, Portfolio) is another household name in the world of investing. With a net worth of nearly $2 billion, it is impossible to argue against the fact that he is one of the best investors who ever lived.
Munger happens to agree with Buffett. He often references long-term investing being the best route to build wealth.Ă‚ Charlie Munger was once quoted as saying:
“The big money is not in the buying and selling, but in the waiting.”
Bill Gates (Trades, Portfolio) defines the trend
Everyone knows the name Bill Gates (Trades, Portfolio). The billionaire founder of Microsoft has become synonymous with success. In the following quote, Gates keeps it short and sweet, but gets the point across nicely:
“Patience is a key element of success.”
Peter Lynch also agrees
Peter Lynch is another successful investor who has earned his position as one of the greats. Again, he took the passive investing approach, advising not to move based on emotion and focus on riding an investment out. Here’s what Lynch has to say:
“The trick is not to learn to trust your gut feelings, but rather to discipline yourself to ignore them. Stand by your stocks as long as the fundamental story of the company hasn’t changed.”
Why passive investing is generally better than active investing or trading
When it comes to the gurus whose names can roll off of the tip of your tongue, the four moguls above are likely four out of five that come to mind. So, why is it that these incredibly successful investing moguls prefer the passive route rather than the active route? There are likely several reasons that include but are not limited to:
- Markets can be temperamental:Ă‚ Active investing requires the investor to make decisions based on market activity. Ultimately, the goal is to take advantage of trends. However, the market can be highly temperamental. This poses a very real challenge for active investors. However, the buy-and-hold, or passive investors make decisions based on intrinsic value and hold shares for the long run. This type of decision making generally leads to consistent long-term profits in the market.
- Active investing is expensive:Ă‚ Every time an investor buys or sells a share, fees are paid to the broker. No matter if you are working with an online discount broker or a financial institution, these fees get quite hefty if you trade too often. As a result, active investors not only have to battle the short-term, generally unpredictable moves in the market, but they have to do so with such success that they are able to overcome the additional cost associated with their choice of investing style.
- Tax benefit:Ă‚ Finally, passive investing tends to come with a tax benefit. After all, the buy-and-hold strategy means that the investor will incur less by way of capital gains taxes.
Final thoughts
While the allure of fast gains that can take place through an active investing strategy may catch your attention, many of the world’s investing gurus agree that the passive approach is the approach that has the most potential to help investors build meaningful wealth.
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