This month: Marcus Padley

Hollywood would have us believe the gung-ho Wolves of Wall Street rule the stockmarket. But the stereotype doesn’t hold up in the real world. In fact, there are eight personality types – and only two succeed

It has always irked me that books with titles like How to make a million dollars in the stockmarket and Ten things you must know about the stockmarket probably sell more copies than my book. It’s my own fault, Stock Market Secrets by Marcus Padley is hardly exciting by comparison and, let’s be honest, if they were really “secrets”, well, they’re not anymore.

But the get-rich-quick books do sell, presumably because there are a lot of financially anxious, unrealistic, desperate and frantic people buying books as a solution to their money problems. But if you think about it, in a sort of Catch 22 for get-richquick books, anyone buying that sort of book probably shouldn’t be responsible for money because anxious, unrealistic, desperate and frantic are hardly the right personality traits for a successful fund manager, and when it comes to investment success personality is everything.

Give 100 people $100,000 each and ask them to invest it on a five-year timeframe and, like the Parable of the Prodigal Son, come back in five years, and I can guarantee that apart from the people with zero who spent it, and those with exactly $100,000 who did nothing, there will be no two investors with exactly the same sum of money, which is odd when you consider that the market conditions were utterly identical for each.

The reason, of course, is that investment outcomes are not a function of method or approach but a reflection of personality. It doesn’t matter whether we all adopt the “intrinsic value” approach, or trade on Gann principles, or use closing price line charts, or intraday candle charts, because every single one of us is going to do something different, because we are all unique and every one of us is going to experience our own “special” outcome.

Even identical twins will fare differently because each investment path is a complex series of multiple micro decisions with varied outcomes based on actions and reactions dictated by genetics, personality and experience. There will be as many investment outcomes as there are humans, because humans are human. They give in to the illogical, to hope, faith, bravery, courage, cowardice, confidence, belief and conviction.

Because of that – and it has to be said – humans are not wired to invest. They destroy reason with emotion. Independence

with bias. Maths with passion. None of us is Spock. We do not live on Vulcan. And thank goodness for that.

Imagine the stockmarket on Vulcan, operating on cold, unemotional logic, maths and probability. No speculation, no guesswork, no assumption, just facts, with prices going straight to intrinsic value without pause. No trending. No charting. Just fact and price. A planet run by value investors. What a bore.

Thankfully, then, we are all stuck on Earth with other humans and their defective investment processes, processes that create a world of entertainment for investors, which means an embarrassment of opportunities. It’s a lot more fun on Earth.

Key personality traits

It’s a daring task, but Earth hasn’t given up trying to understand investor complexity completely. On Earth we have these people called psychologists who attempt to apply logic in our space by breaking investors into groups. One of my favourite attempts to do this is contained in a book called The Psychology of Investing by Colin Nicholson in which the writer, an investor quoting a psychologist, helps us break down investors into general personality traits. The key to it is putting people into groups depending on how they handle uncertainty or, more obviously, risk.

In brief, the breakdown is that people come in three general temperaments, each with two extremes, including “unpleasant” or “pleasant”, “arousable” or “unarousable”, “submissive” or “dominant”, and the eight various combinations of those three pigeonhole investors produce eight investment personality types: exuberant, dependent, relaxed, docile, hostile, anxious, disdainful or bored.

Turns out the relaxed (pleasant, unarousable and dominant) and the docile (pleasant, unarousable and submissive) are the most suited to investment success and the rest, anyone unpleasant or arousable, is at a disadvantage.

Armed with this information, you now have to take a good hard look at yourself and, for that matter, your adviser. Are they aggressive or docile, pleasant or unpleasant, dominant or submissive, because, odd as it is, the traditional image of a successful Wolf of Wall Street, Bud Fox type-A broker displays all the wrong personality traits for investment success, because aggressive and unpleasant is bad or, in the words of the Desiderata, beware loud and aggressive people, they are vexatious to the spirit. And the bank balance, it turns out.

All that shouting, swearing, phone slamming, rude, bad-mouthed, uncouth, belligerent, coarse, egotistical, crudeness is not, contrary to Hollywood generalisation, the sort of personality trait you want in an investor or, if you use one, a broker.

What you want is someone laidback, reliable, emotionally stable, cool under pressure, someone with that Dunkirk spirit, the sort of person who goes to the running of the Pamplona bulls and walks. Someone who is pleasant without being obsequious, agreeable without being subservient and decisive without being overbearing.

Fortunately, this also describes the bulk of those patient long-term investors who form the core of most full-service brokers’ client bases, because pleasant and patient people are psychologically suited to the stockmarket.

In which case, even if there has been a disturbance in the force, like the GFC or the pandemic, you are probably going to be better off retaining your pleasant and patient temperament rather than attempting something radical and new. Being pleasant and patient may not have worked well in a bear market but becoming loud and aggressive will accomplish even less.

So don’t change, all you nice and pleasant clients out there. Your odds are much better if you can stay just the way you are. As for the rest of you … are you sure you should be in the stockmarket?

Marcus Padley is the author of the daily stock market newsletter Marcus Today. For a free trial of the Marcus Today newsletter, go to marcustoday.com.au.

Humans are not wired to invest. They destroy reason with emotion. Independence with bias. Maths with passion. None of us is Spock.