What Is Passive Investing? - AXIAM Capital Management

Passive investing or as Charlie Munger called it “sit on your ass” investing is a concept that has played a key role in the growth and success of Berkshire Hathaway; the firm that is built around the successful investing partnership of Charlie Munger and Warren Buffett.

Active vs. Passive Investing

Active investors buy shares with the primary intent of selling them later at a higher price. Active investors must watch the movement of share prices and the rumours and sentiments that may cause the share price to rise or fall as they hope to profit on a quick sale at the right time.

Aside from the inherent fees and taxes that impact any gains, active investing may earn, it is fraught with rollercoaster emotions and the risk of missing the sweet spot sale.

you should only buy a stock if you are willing to hold it for ten years, and if you are willing to commit a substantial portion of your money to it.

Charlie Munger’s view

3 Core Components to Passive Investing

Passive investing has three key components that provide long-term value to investors.

The first step is to find a few outstanding companies, buy them and hold onto the shares forever. A company that owns strong brands, provides for a basic human need and is able to distribute their product all around the world is a good start. For Berkshire Hathaway, Coca-Cola and See’s Candies are these kinds of companies. At AXIAM all the shares in our portfolio meet these requirements as we plan to hold onto them for a long time. For more insight, our Wealth Blog on why we bought Coca-Cola.
High return on capital is the next key aspect for successful passive investing. This means the company you invest in must be able to produce sufficient cash to be able to pay its shareholders a dividend and keep growing.
A high return on capital also alleviates the pressure to buy shares at the lowest possible price. As Charlie Munger explained in his speech entitled “A Lesson on Elementary, Worldly Wisdom As It Relates To Investment Management & Business”
The final element is the magic of compounding your passive investment. As your investment pays dividends each year, reinvest that income and allow it to grow your investment and the income potential. You can learn more about compounding in our Wealth Blog on Compounding Dividend Income.

Over the long term, it’s hard for a stock to earn a much better return than the business which underlies it earns. If the business earns 6% on capital over 40 years and you hold it for that 40 years, you’re not going to make much different than a 6% return—even if you originally buy it at a huge discount. Conversely, if a business earns 18% on capital over 20 or 30 years, even if you pay an expensive looking price, you’ll end up with a fine result.

So as you can see, Charlie had good reason to call passive investing “sit on your ass” investing, because once the decision to invest in a few outstanding companies has been made, you really can stop worrying about the share price, sit back and watch your investment grow.

At AXIAM, we buy shares in companies, regardless of their geography, that have great brands that are known, loved and used around the world daily and we keep them for a long time. Sign up to our newsletter or follow us on Twitter to learn more about investment in the best global brands or contact our fund management team to invest.