Why do active investors need to commit more time and effort?

Here's the translation:

Buddy, you've hit the nail on the head with this question – it gets right to the heart of investing. Instead of diving into complex financial models, let's talk about this in plain language.

Think of Active Investing and Passive Investing (also called Index Investing) as two completely different lifestyles.

Passive Investing: It's like going to a highly reputable all-you-can-eat buffet. You don't worry about how the kitchen runs, you don't pick individual dishes, and you don't stress over whether a particular dish was cooked well that day. You pay, grab a plate, and take a little bit of everything the restaurant offers (e.g., the 300 most representative companies in China’s A-share market, like the "CSI 300 Index"). In the end, your overall experience (return) will roughly match the buffet's average quality (market average return). It's hassle-free and suitable for most ordinary folks who don't have time to research.
Active Investing: This is like opening your own restaurant. That changes everything.

Now, let's look at why running this "restaurant" (active investing) is way more demanding than "dining at the buffet" (passive investing).

The Goals Aren't in the Same League: Beating the Market vs. Keeping Up

First, you need to understand that the goal of an active investor isn't just to "keep up with the market"; it's to beat the market.

Think of it like exams. The passive investor's goal is just to pass – to achieve the class average. The active investor's goal, however, is to rank in the top few. Which do you think is easier: getting the average score or landing in the top five? Clearly, the latter is much harder and requires extra effort.

Where Exactly Does All That "Extra Time and Effort" Go?

So, what does this "extra effort" entail? It mainly falls into these areas:

1. Playing Detective: Digging into a Company's Foundation

Passive investors buy a basket of stocks (an index fund) and don't need to care about which specific companies inside are good or bad. But you, as an active investor, must dive in and investigate every company you're interested in like a detective, turning it inside out.

Scouring Financial Statements: You have to examine the company's financial reports – the infamous balance sheets, income statements, and cash flow statements. Can you tell if the company is genuinely profitable or faking it? How much debt does it have? Does it have enough cash on hand? It's like giving someone a full medical checkup: extremely time-consuming and mentally taxing.
Finding the "Bang for Your Buck": Benjamin Graham's core idea (author of The Intelligent Investor) is to find companies priced below their intrinsic value – essentially, "bargain hunting." To find these bargains, you first need to learn how to value a company. That's no easy task, requiring significant calculation and judgment. Once you find one, you also need to ensure there's a sufficient margin of Safety. This means buying something worth at least $1 for 50 cents, so even if you're wrong, you won't lose too badly.

2. Acting Like the Owner: Understanding the Actual Business

Numbers alone aren't enough. You have to understand the company's actual "business" like an owner would.

The Moat: What does this company actually do? Does its product or service have a unique advantage that's hard for others to copy (the so-called "economic moat")? For example, Kweichow Moutai's brand and production methods, or Tencent's social network – these are their moats.
Industry Outlook: Is this industry booming, or is it like the sunset for pagers? Are you investing in the new energy vehicle sector or a declining industry?
Management: Is this company's management trustworthy? Are they action-oriented or just good at feeding you hype? You need to watch their interviews and analyze their past decisions.

This is like considering opening a franchise milk tea shop. You can't just look at the advertised profits; you need to taste the product, observe the customer flow, and understand the owner's business philosophy firsthand.

3. Acting as a Therapist: Battling Market Sentiment

This is the hardest and most energy-draining part. Graham famously called it dealing with "Mr. Market."

Imagine you have a business partner named "Mr. Market." He shows up every day offering you a price for the stocks you hold. His moods swing wildly. Sometimes he's wildly optimistic and offers you sky-high prices; other times he's deeply pessimistic, practically begging to dump his stocks at rock-bottom prices.

Passive Investors: Pay no attention to this manic "Mr. Market." They just stick to their scheduled investing plan (like dollar-cost averaging).
Active Investors: Your job is to have the courage to buy from Mr. Market when he's deeply depressed and offering ridiculously low prices, and to sell to him when he's irrationally exuberant and offering crazy high prices.

This means when everyone else is panicking and selling during a market crash, you need to withstand the pressure, analyze coldly, and possibly buy against the trend. When everyone is going crazy during a bull market, you may need to quietly start selling and exit. Acting against your instincts like this requires incredible psychological resilience and discipline. It's way tougher than analyzing financial statements!

4. Gardening: Ongoing Monitoring and Maintenance

Buying is just the start. You're like a gardener – after planting seeds, you need to constantly water, fertilize, weed, and protect against pests.

You need to continually track the companies you've invested in, regularly checking:

Is the original reason for buying still valid?
Has the company's fundamental health deteriorated?
Is there a better investment opportunity emerging?
Has the stock price risen too high into bubble territory, meaning it's time to sell?

This process is relentless. As long as you hold a company's stock, your job isn't finished.

Wrapping It Up

So, you see, active investing is like a professional job, even a craft. It demands significant time investment for research and analysis, along with enormous mental fortitude to combat human greed and fear.

Passive investing, on the other hand, is a smart form of "giving up." It acknowledges that most ordinary people don't have the time or energy to consistently beat the market, so they simply choose to align with the market to earn a decent average return.

For the vast majority of people, taking Graham's advice to be a "defensive investor" (essentially what we call a passive investor today) – buying some index funds and holding them long-term – is likely the more realistic and wiser choice. But if you genuinely have a strong interest in business analysis and are willing to treat investing as a serious endeavor, then the active investing path, while demanding, offers unique intellectual satisfaction and potential rewards that are truly one-of-a-kind.