Over the years I have been fortunate enough to meet many “mum and dad” investors from around the world. And it is fair to say that although I met most in my capacity as an educator, they have taught me many valuable lessons in turn.
While everyone is of course unique, and there is a wide spectrum of investors out there, it is nonetheless possible to classify most people as belonging to one of 4 broad categories. Moreover, I believe there are valuable lessons that can be learnt from these archetypes.
Lured to the markets by promises of vast and easy profits, the gambler is unfortunately a sizeable group. Typically male, these “investors” are prepared to risk large sums of money on speculative and volatile shares in the hope of making that one big win. Like all gamblers they tend to ignore any losses, boast about the wins and continually chase the perfect trade.
To their credit, they are highly motivated and driven to learn all they can. But unfortunately this can make them very popular with discount brokers, churning accounts as they experiment and try to build trading systems without proper plans and risk management. Many people belonging to this group will eventually end up like any gambler; broke and bitter, rather than learn proven formulas for market success.
The famous investor Sir John Templeton said “The stock market is not a casino, but if you move in and out of stocks every time they move a point or two, the market will be your casino. And you may lose eventually…or frequently.”
Don’t become a gambler. Don’t trade or invest based around emotion. Always have a plan. Boring, age old adages that have survived the test of time and represent timeless wisdom.
Regardless of what the facts are, there are those that refuse to acknowledge that the market can offer sensible and conservative investment opportunities. Some may have come to this view due to a bad experience with shares (former gambler, see above), others may simply be doubtful due to negative media commentary.
The skeptic will often hold many misconceptions about the share market, and will be ready to quote you any number of examples that support this pessimistic view (HIH, ABC Learning, Allco Finance). This view does nothing except prevent skeptics from participating in the best performing asset class available. And this in turn seriously limits their wealth creation potential.
The timid investor is essentially the exact opposite of the gambler. While they are convinced of the benefits of share ownership in principle, they falter when it comes to the real thing.
When prices are going down, they are reluctant to buy for fear that the down trend will continue. When prices are rising, they are convinced prices are over inflated and remain on the sidelines in anticipation of a pull back.
For those that do take the plunge and buy some shares, they sell out at the first sign of trouble and crystalise their losses, removing their exposure to any eventual recovery. Likewise, shares that gain ground are soon liquidated for fear that they may soon reverse direction. In doing so they often miss out on much better returns down the track. In short, the timid investor is often doomed to fail.
The greatest mistake these investors make is the failure to recognize that markets are volatile. And while that means that it is a poor asset class to park your capital in the short term, it always has (and always will) give exceptional results in the long term. The other great mistake these investors make is to let their investment decisions be driven by emotion.
This final group is perhaps the smallest, but it is in my experience, the group that has the most success in the market. More often than not, these are the people that have managed to ignore the day to day trials and tribulations of the market and have instead remained resolutely focused on the bigger picture.
Typically, this group is composed mostly of people over 50 who have often done nothing more complicated than buy a mix of quality blue chip shares. They know that regardless of what prices do in the short term, their companies will for the most part continue to pay them reliable, rising and tax effective income. And they have also seen many recessions and bear markets and understand that no matter how bleak the outlook, the human race has survived and gone onto greater prosperity.
The imperturbable investor usually belongs to that era where people bought shares so as to become a shareholder – not to profit from a short term change in share price. They understand the business they invest in, they read all the correspondence, they attend the Annual General Meetings (AGM’s) and they vote in company matters. They know nothing of advanced technical indicators and trade philosophies, and yet tend to out-perform their younger and more reckless counterparts. Grandma it turns out is nearly the perfect model for retail investors to aspire to.
The Income Investor
The best method for investing in the markets is, without doubt, income investing. Using the courage and drive of a gambler, the statistical proof needed by a skeptic, the risk management of the timid and the patience of the imperturbable investor – well, you just might become a total investor. If you would like to learn the methods of the total investor, why not register for the DividendKey? (www.dividendkey.com)
Make the markets work for you