- Investment strategies
- Why invest in the stock market?
- Buy and hold or technical analysis? Why you need an investment plan
- Value investing and short selling in volatile markets
- Using technical analysis to support value investing
- Investing in the unexpected
- Franking credits, explained
- What is dividend stripping and is it a sensible strategy?
- Investing in quality IPOs
- How to invest in stocks that benefit from a moving Australian dollar
- Reasons to avoid bonds when interest rates are low
- How value investors use Skaffold
- Quality, growth and value = a winning strategy
- Know your investor type and boost your performance
- Technical + fundamental analysis = better buy and sell decisions
- Fundamental investing
- Value investing and the price earnings ratio
- Intrinsic valuation models and methodology
- Value investments or value traps?
- How to find value stocks in a bull market
- Find value investments in expanding markets
- Why capital raisings struggle to add investment value
- How to value an insurance company
- Top stocks
- 5 qualities of top stocks
- How to find stocks with a competitive advantage
- Why return on equity is the best measure of business performance
- Using cash flow to find value investments
- Finding high quality dividend stocks
- Debt is not always a dirty word
- Why Skaffold share investment software makes sense
- Using economic factors to uncover the best investment options
- How do experts find top stocks to invest in?
- Investing in global stocks
- How to invest in international shares on global stock markets
- Benefits of investing in international shares
Knowing your investment type can boost your portfolio performance
Knowing the strengths and weakness of the seven popular investor types, and finding a style that suits you, can help you make better investment decisions.
Some investors are incredibly conservative, while others love the thrill of a big trade. Fundamental investors insist on knowing every little detail of a stock, while technical traders rely on signals from charts.
The beauty of investing in the stock market is that you can be a successful investor, no matter what your style. You just need to know what type of investor you are.
While your personality and investment goals are unique, you’ll most likely feel a connection with one of the popular types of investors. Knowing the strengths and weakness of that investor type can help you to make better investment decisions.
Which investor type are you?
1. Big Punter, George Soros
Big punters love the thrill of the trade. Slow and steady is not in their vocabulary. They’re on the lookout for that one big trade that will either make or break their bank balance. Sometimes their bets come good, but the investing landscape is littered with big punters whose “sure trade” didn’t go as anticipated.
Tip: It’s important for the big punter to know when they are wrong so they can cut short their losses.
George Soros attained fame as “ the man who broke the Bank of England”. In 1992 Soros bet against the bank’s unwillingness to float its currency or raise interest rates. Soros bet 10 billion pounds that the bank’s policies would fail. When the Bank of England was finally forced to devalue the pound, Soros was left US$1.1 billion richer.
2. Market Technician, Martin S. Schwartz
Technical analysis traders are glued to their computer screens, watching share price charts for hints into the future direction of share prices. Technical traders are fluent in stochastic oscillators, Bollinger bands and candlesticks.
Tip: Technical indicators, aka charts, are just that – indicators. Whilst charting and technical analysis gives investors an idea of what could happen, market forces can easily make a mockery of any trade that relies solely on a historical price pattern.
At one time responsible for 10 per cent of the total daily volume on the S&P 500 futures contract, Martin Schwartz is one of the greatest technical traders who ever lived. When skeptics challenged the validity of his methods, Schwartz remarked, “I always laugh at people who say ‘I've never met a rich technician.’ I love that! It’s such an arrogant, nonsensical response. I used fundamentals for nine years and got rich as a technician".
3. Quant analysis, Myron Scholes
Quants use mathematical formulas to make investment decisions. Mean reversion, capital pricing theory and volatility clustering are part of the quant’s vocabulary. They spend hours developing complex financial models and algorithms, often with the help of powerful computers.
Tip: Things that are statistically “impossible” occur frequently. Quants need to make sure they cater for the “black swan” that brings down their system.
Myron Scholes co-developed the Nobel Prize-winning formula used in the calculation of stock options, the Black-Scholes model. He is infamous for his involvement in the Long-Term Capital Management (LTCM) hedge fund debacle of the late 1990s. LTCM achieved an annualised 40% return on their capital before coming unstuck during the 1998 Russian financial crisis, losing $4.6 billion dollars and bringing the global capital market to its knees. LTCM is a lesson that statistically “impossible” events occur in the stock market.
4. Systematic Trader, Richard Dennis
Systematic traders follow trends. They’re happy to take small losses in anticipation of a big win.
System traders can be contrarians, trading failed breakouts with tight stop-losses to avoid getting stuck the wrong way against the trend. System traders take every signal their trading system presents them, because they know that the one they fail to take could be the trade that produces all their profits for the month (or year).
Tip: Be wary of system death. The Turtle system that made millions for Richard Dennis has been flat or lost money since the 1990s.
Dennis, the “prince of the pit”, reportedly made $200 million on $1,600 dollars he borrowed in only ten years. Dennis is the progenitor of the Turtles, an experiment into whether trading could be taught or if it required innate ability. After a discussion with fellow trader William Eckhart, the pair recruited 21 investors and trained them in a simple commodity trading system. While some traders failed (though they were all taught exactly the same thing) a number were successful in making millions of dollars. A study of the Turtles reveals the importance of your psychology on your investing performance.
5. Fundamental Investor, Benjamin Graham
Fundamental investors are simply interested in buying top stocks. They treat the stock market as a place to go bargain hunting for under-valued stocks. Fundamental investors spend their days pouring over financial statements and meet with a company’s management. They’ll even hang out in supermarket isles observing buyers’ reactions to their potential investments products.
Tip: Before you buy a stock, check that you are not a victim of “sunk cost effect”. If you spend hours researching a stock it can be hard to walk away from it. Investors tend to find reasons to justify their purchase, because they don’t want the time they have spent to seem like a waste.
Benjamin Graham is the granddaddy of fundamental investing. Graham’s investing method involves buying high quality stocks at a “margin of safety” to their intrinsic value – that is, when the share price was less than his calculation of the intrinsic value of the company.
6. Contrarian, Paul Tudor Jones
Contrarians believe that opportunity is to be had away from the herd. When you’re buying stocks, the contrarian is selling. They like to invest at extremes of fear – when everyone else is fed up and can’t take the pain any longer, in steps the contrarian to gobble up the best stocks at bargain prices. Similarly when greed is in abundance and everyone is piling into the stock market when it’s making new highs, the contrarian knows that it’s time to sell – or if they are brave, they might even go short.
Tip: A trend can continue on far longer than may seem logical. Many a contrarian has been burnt by shorting an irrational bubble.
A consummate contrarian, Paul Tudor Jones is America’s 100th (or there about) richest man.
While most investors get “killed” trying to pick tops and bottoms, Jones believes “the very best money is made when the market turns. Everyone says you get killed trying to pick tops and bottoms and you make all your money by playing the trend in the middle. Well, for twelve years I have been missing the meat in the middle, but I have made a lot of money at tops and bottoms."
7. Macro Investor, Louis Bacon
Individual companies don’t matter to macro investors; it’s whole countries they’re interested in. Macro investors are sponges for world news and invest based on global fundamentals. This could be the collapse of the housing market in the US, or on the success or failure of “Abenomics” in Japan.
Tip: Not all macro trends are what they seem on the surface. Dig deep into an idea before you invest in it.
If Benjamin Graham is the granddaddy of fundamental investing, then Bacon is the modern father of macro investing. In the 1990s when the concept of macro investing was rarely heard of, Bacon bet that Iraq would easily capitulate against the US in the First Gulf War, and that the oil market would recover as a result. This view led to a big payday for Bacon’s hedge fund. Bacon’s accurate macro predictions returned 35 per cent a year over thirteen years.
This article was written by Sam Eder, Founder of SpoonFed Investor.