How to decide which type of investor you should be
March 29, 2011 1 Comment
At the heart of any investment strategy is a key decision that the investor needs to make right at the start. This decision could change based on life circumstances and priorities (hopefully not based on swinging moods), but once made, it is important for investors to stick to that. And that decision is what type of investor should you be?
I mention this as a decision that the investor must make, because a lot of current advise seems to try and answer the question – what type of investor are you? rather than what type of investor should you be? The former, I think, is a wrong question to ask – likely to end with the right answers to the wrong question. Very often, in response to this wrong question, investors will end up with the right answers that provide characteristics like aggressive, moderate and risk-averse, derived on a questionnaire around mental make-up, age, income level, etc. Whereas, if one shifts the onus on the decision to be made by the investor – on what type of investor should I be – the next question that comes up will be – how should I decide that? Now that’s a good question to ask.
The answer to that is provided by legendary value investor Benjamin Graham in his investment classic “The Intelligent Investor”. That decision should be taken based on a simple criteria: Am I willing to put in more effort for more returns? If that is the case, I would be an aggressive (or enterprising) investor. If that is not the case, I would be a defensive investor, and should be happy with lower returns.
Very simple – like all other things in life. If you are willing to work for it, you deserve higher returns, else be happy with lower returns.
This may seem like a simple decision to make – but is not easy to stick to. A lot of investors end up trying to be both, and often with bad results. As Graham says, there is nothing like a part-time enterprising investor, because one does not know what one doesn’t know, till experience teaches it. But that is a discussion for another day.
The key is – to take this decision on what type of investor you should be, and sticking to it. Your circumstances may change in which case you may make a conscious decision to change your type. But it should be like a switch – on or off. This decision will have a bearing on the kind of portfolio that should be cultivated. Anything in between may provide excitement, but may not provide investment results.