Girls That Invest

10The lazy investor

By now you understand the difference between active and passive investors. Active investors are trying to beat the market average by choosing stocks, putting time and energy into reading company financial statements, skimming through balance sheets, looking at a company's assets and debt and reviewing how the company controls its cash flow.

Some active investors can beat the market in the short term but this gets harder as time goes on, and for long‐term investors — those who are investing for 10‐plus years — they're better off taking the passive approach, or at least keeping some of their portfolio in a passive strategy. In this chapter we'll get into the lazy (i.e. passive) investor strategy, but first, let's look into how active investors do what they do.

Active investors

Active investing can be broken down into two approaches: fundamental analysis and technical analysis.

Fundamental analysis

Fundamental analysis is the practice of trying to work out the intrinsic value of a stock because you believe the intrinsic value is different to its actual value. You look at the book value of companies and analyse tables to see if it's worth your time. It's the process Warren Buffett uses to determine if he will invest in a company or not.

My mum practises fundamental analysis when we travel to India by only paying what she believes something is worth at markets. In the process of haggling, if she believes something is worth 100 rupees and the shopkeeper is ...