Introduction

I believe that building and managing a successful stock portfolio is simple and straightforward, but not necessarily easy. Building and successfully managing a portfolio of individual stocks requires work, a disciplined philosophy and a reasonable commitment of time. But perhaps most importantly, it’s critical to start out with a precise understanding and acceptance of how you approach the investing process.

You can either behave as a prudent long-term investor or as an active trader. The differences between these two approaches are not subtle – they are vast. Unfortunately, at least in my personal experience, there are many well-intentioned people that feel they would be most comfortable with the prudent long-term investor approach, but cannot resist the seduction of stock price volatility. No matter how hard these investors try, they cannot ignore the daily ups-and-downs of stock price movements.

As one Morningstar writer I once read so aptly put it: “Given the proclivity of Mr. Market to plead temporary insanity at the drop of a hat, we strongly believe that it’s not worth devoting any time to predicting its actions.” Stated more directly, in the short run, stock price movements are often irrational and consequently unpredictable. Later I will provide a clear example supporting the veracity of that statement. Nevertheless, there are many active traders that believe they have an edge; however, I’ve yet to have anyone convince me that they in truth and fact do.

This brings me to the primary difference between the mindsets and perspectives of active traders versus long-term investors. Active traders tend to primarily be stock price focused.In their world, everything is about whether the price of the stock is rising or falling. A stock with a falling stock price is a bad stock, where a stock with a rising stock price is a good stock. Active traders possess more of a casino-like mentality and as such have little or no regard or concern about fundamentals or business values.

Ironically, the active trading approach requires more time, energy and effort than does a more prudent long-term approach.In other words, active trading essentially turns investing into a full-time job. Consequently, I contend that this approach is not appropriate for most people. Most of us have more important things to do with our lives and time than sitting in front of a computer screen obsessively tracking stock prices.

In contrast, long-term investing implies focusing more on the business you are invested in with little or even no concern about short-term price volatility. Instead of focusing on price movements, the focus is on the company’s financial performance and fundamental strengths. Prudent long-term investors understand that in the long run it’s the success of the business that truly matters most. These investors recognize and understand that buying a stock represents becoming a part owner in a business.

Personally, when I invest in a stock as a passive shareholder/owner, I am not interested in running the business. I leave that work to the management team. The only work I’m interested in is having my money working for me. As a minority shareholder, I am keenly interested in how the company is doing and only mildly interested in its short-term stock price movements.This is especially relevant when I have a clear understanding of what the business is worth. Therefore, if or when short-term market price drops below that level, I never assume I’m losing money. Especially if the business I own is continuing to perform as expected. Instead, I simply consider the business temporarily illiquid.

Therefore, if I did need to raise money, for example, in an emergency, I would look to other stocks I might own that the market was either valuing correctly or overvaluing. My point is that I don’t consider it intelligent to sell an asset for less than I believe it is worth. This type of business owner’s mindset goes a long way towards keeping emotion out of the investing equation. I draw my confidence from the strength and health of the business I own which keeps me from panicking during periods of high market volatility.

I have chosen the business below because I believe it is attractively valued and because it offers a high-yield in today’s low interest rate environment. However, this particular business also offers important insights and represents a quintessential example of the principles I have been discussing in this introduction. In other words, not only do I consider it an excellent investment at this time, I also feel it offers vitally important investing lessons. I intend to elaborate on both as I review Cisco Systems, Inc. (CSCO) below.