The Defensive Investor

In this post, I will discuss the philosophy of "Defensive" investing as opposed to "Active" investing. Defensive investing should be and is followed by people who don't want to take undue risk and who are not willing to take the time to actively analyse companies and stocks. I will mainly concentrate on investing in stocks, but defensive investing principles also apply to other investments. The biggest advantage of defensive investing...it is so easy!

What is defensive investing?
Defensive investing is explained very well by Benjamin Graham in his classic book 'The Intelligent Investor'. I quote:
"The defensive (or passive) investor will place his chief emphasis on the avoidance of serious mistakes or losses. His second aim will be freedom from effort, annoyance, and the need for making frequent decisions. The determining trait of the active (or enterprising, or aggressive) investor is his willingness to devote time and care to the selection of securities that are both sound and more attractive than the average."

Based on this definition, defensive investing implies investing in relatively safe stocks (securities), and freedom from constantly monitoring your investments. If you get hold of the concept of defensive investing, you lose the urge to constantly monitor your investments and the stock market. You sleep much better too. Active investors on the other hand devote much time and care into hand-picking stocks which are both sound and give better-than-average returns. Generally they do it as a full-time job.

My main aim in this post is to tell you that there are other ways to invest in stocks besides sitting constantly in front of a computer screen and yelling Sell, Sell, SELLLL...

Are you a defensive or an active investor?
One of the first things that you should decide is whether you are a defensive investor or an active investor. To be an active investor, you need to devote a substantial amount of time to researching stocks and companies, and you should be doing it as a full time job. If you know that you cannot devote this time to your investments, then I suggest you become a defensive investor like me.

How do I become a defensive investor?
Lets take a look again at the traits of a defensive investor:

• Avoids serious mistakes
• Doesn't devote too much time to investing

How can defensive investors accomplish this with little or no knowledge about stocks? By Diversification. In my view, the essense of all this is to diversify your investment. Diversification is the key for defensive investors, and if your portfolio is adequately diversified I would say that you are protected from the pitfalls of stock investing.
The next point is the type of stocks to buy. For investors to be safe, they should aim at building a sufficiently diversified portfolio with the 30 largest, blue-chip companies available. These large-caps, as they are referred to, have a substantial history behind them and investors are pretty much assured that the money they invest in them will never be wiped out.
The last point would be to keep investing periodically. The reason why investing periodically is safe is because of Cost Averaging. Investing periodically removes all the hassels of timing your stock investments, and frees you.

So, where can you find sufficient diversification, a primarily large-cap portfolio, plus the opportunity to invest periodically?

Index funds - A boon for defensive investors
I would have thought the answer was obvious. Index funds offer instant diversification, and the main indices like India's Sensex and Nifty track the best of the best large-cap blue-chip companies. You also have the option of taking a systematic investment plan (SIP) with an Index fund.
So, just take an SIP with an Index fund and then forget about it for the next 10 years. Increase your SIP amount as your salary increases. Simple.

You say...But is that all???
Yes, investing is not difficult. Defensive investing, especially, is easy for the know-nothing investor. You just need to get your basics right, read a couple of good books on investing and you're set. Happy investing.