What about “active” and “passive” businesses?

We believe that most businesses are “active” pursuits.

Businesses operate within a competitive external environment such that a “set and forget” strategy is not really appropriate, as you risk losing your market position by taking too passive an approach.

Any business where you are the full-owner or are actively involved in its day-to-day operations, should generally be an active pursuit.

Even if you have managers or other staff there in place of you, you still need to actively manage staff and oversee the business and all the risks involved in running a business.

Furthermore, even if you are just a part-owner and have some shares in a business, where you may not necessarily be actively involved in its day-to-day operations and are there more as a “silent” investor, you still face the same business risks that you are placing trust in your business partners to manage.

When we say businesses here, we are talking about private businesses (ie. those not listed on the Australian Stock Exchange – ASX).

Although investing in shares of public companies listed on the ASX is effectively like being a part-owner of a business (albeit a large one), the low entry costs and liquidity make this a relatively safer investing vehicle than having ownership or shares directly in private businesses (where entry investment levels are higher, and the investment may be quite illiquid), for most people.

Having said that, if you do have particular knowledge, experience or skills in an industry, then leveraging off this to start or purchase one or more businesses in your field may be to your advantage, but you just need to be very “active” about managing all of the potential risks.

Furthemore, it may strategically be better to allocate most of your investment capital towards growing your business initially, rather than towards passive investments.

Though later on, passive investments will still be important and have a role in the long-term investment portfolio of an active business person.

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