Market players should get acquainted with their “investment personality”
New investors in the stock market have many options nowadays from letting a robot choose their investments to discount broker do-it-yourself, full service human contact to mutual fund managers. Every investor should know a few basic personality traits before embarking into the stock market.
First trait: know what kind of investment personality you have and tailor your investments accordingly.
Most brokers and banks have investment personality tests to score where on the range of risk tolerance you fit. Or find one online.
Investment personalities break down into three basic categories: investors, speculators and gamblers.
The investor is a small-c conservative who only buys into a near sure things like blue chip dividend paying stocks with sound finances and long track records.
The speculator will take on higher levels of risk than the investor. The speculators will carefully, they believe, calculate the chance of success for an investment and make decisions based on that information. The gambler is just that: a player seeking thrills and chasing rainbows with no real concern about the finances of a company or the sector.
In the classic fable, the race between the hare and the tortoise, the gambler would instantly bet heavily on the hare.
The investor would bet on the tortoise, preferring slow and steady, while the speculator would calculate speeds and other factors before making a decision, possibly betting on both.
In today’s high-priced untested cannabis stock market, the investor shakes his or her head and stays out of that game. The speculator will try and determine a present or future value, if possible, based on all the uncertain estimated variables while the gambler will plunge in because “it can only go up.”
Your investment personality can change based on your age and need to conserve your nest egg, and accumulation of wealth that offers the ability to take more risk, or on not having anything to lose.
Rule Number One for some investors is: Don’t lose any money. Ditto for Rules Two and Three.
But you will lose money at times. Everybody does. The goal is to keep losses small and rack up more gains than losses over time. If you can’t sleep with that notion you might be better off staying out of the market.
Second trait: develop a strategy based on your investment personality and stick with it.
Three styles of investment strategy involve value investing, growth at a reasonable price investing and momentum investing.
Lowest risk of loss should be from value investing, although sometimes good deals are too good. Annual return on investment is less too.
Greater risk of loss comes with growth at a reasonable price investing where investors hunt for companies that will grow and gain value without overpaying. This style should increase the percentage return. Momentum investors can be successful if they pay close attention and trade a lot. Many spend a lot of sleepless nights, or time re-building a stake to try again. A veteran investor may combine the techniques and tools of all three styles at various stages of market cycles.
There is no one solution to investing success. Every time you think you have scoped out the market it will throw another curve at you — making the market frustrating and fascinating.
Ron Walter can be reached at ronjoy@ sasktel.net