What Kind Of Investor Are You?

By David McEwen

Monday 27th August 2001

Are investors all the same? At first glance, it would appear so. Everyone is trying to buy low and sell high.

However, New Zealand investors fall into certain well-defined categories. Here is a selection:

- The Gossips

Forgetting the message that you generally get what you pay for, these investors often buy companies they know little about, simply because they get a hot tip from someone. That someone could be the next-door neighbour, a relative or work colleague. In many cases, the so-called hot tip is based on third-hand rumours that rarely come true.

- Sooth Heeders

Once upon a time, people relied on chicken entrails, tealeaves or the stars for guidance. Nowadays, they use complex computer models that churn out technical charts, forecast cash flows and per-share valuations. Retail versions of such models sell for thousands of dollars and promise stellar returns. Unfortunately, in the vast majority of cases, they don't deliver.

That's because investment markets are too variable and random to be able to accurately predict the future from the past. One incorrect assumption in a computer model, no matter how sophisticated, is going to produce the wrong result.

- Mountain Climbers

These types look down at the world from a lofty perch and try to figure out what to buy and sell based on macroeconomic trends. Currency movements, economic growth rates, interest rates and the like are carefully considered before individual investments are identified.

Unfortunately, economies are more complex than markets and therefore harder to forecast. If professional economists can't get it right regularly, what hope is there for the rest of us?

- Random Walkers

These work on the assumtion that markets are inherently logical and efficient. Therefore, there is no chance of being able to buy an asset at less than its true value, they say. That leaves arcane calculations about relative volatilities, asset allocation and growth rates to determine what to invest in. Once again, this requires a lot of number crunching and guesswork although others simply buy indexed funds.

- Knee Jerkers

These tend to act before they think. The price of an asset has risen strongly, so they buy in the hope it goes up even further. If it falls steeply, they get scared and sell. What they don't lose on the market, they fritter away in transaction fees.

- Valuers

These highbrow types try to remove themselves from the greed/fear cycle by ignoring price movements.

They try to value an investment based on the return it is generating, and is expected to return, on capital. If this return beats other options and rewards the risk being taken, then it is purchased. However, they rely on other investors to eventually catch up with their cleverness and this does not always occur.

Some of these investment methods are more worthwhile than others but none offer a path to guaranteed riches. If there were such a thing, everyone would be following that path and there would be no buyers or sellers on the other side of each transaction.

The important thing is that investors adopt investment techniques that fit their objectives and personalities.

The beauty of investment is that every theory is testable. If one doesn't deliver profits, then move on to another. Today's knee jerker or gossip can become tomorrow's considered investor.

David McEwen is an investment adviser and author of weekly share market newsletter McEwen's Investment Report. He is commissioned by the New Zealand Stock Exchange to write an independent personal investment column. He can be reached by email at davidm@mcewen.co.nz.

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