Types of Investors – What type are you?Kapil
I came across this good article at http://www.threetypes.com/philosophy/investor-types.shtml and wanted to share. It essentially discusses the various types of Investors viz : Savers, Speculators and Specialists and then goes on to explain how becoming a Specialist, is something which generates immense wealth over lesser periods of time , but which also requires tremendous efforts on the part of the investor.
Go ahead and decide which type of investor you are and then invest accordingly. Enjoy Investing…..
Savers are those people who spend the majority of their life slowly growing their “nest egg” in order to ensure a comfortable retirement. Savers explicitly choose not to focus their time on investing or investment strategy; they either entrust others to dictate their investments (money managers or financial planners) or they simply diversify their investments across a number of different asset classes (they create “a diversified portfolio”). For those who create a diversified portfolio, their primary investing strategy is to hedge each of their investments with other “non-correlated” investments, and ultimately generate a consistent annual return in the range of 3-8% (after adjusting for inflation). Those who entrust their money to professional money managers generally get the same level of diversification, and the same 3-8% returns (minus the management fees).
Savers seek low-risk growth of their capital, and in return, are willing to accept a relatively low rate of return. While there is certainly nothing wrong with striving for consistent returns, what the Saver is doing is really no different than putting their money in a Certificate of Deposit, albeit with slightly higher returns. The bulk of Savers are investing for long-term financial security and retirement. They start saving in their 20’s and 30’s by putting money in 401(k) accounts, mutual funds, and other diversified investments, and in 30 or 40 years, they have enough to retire on.
Savers rely in a single force to grow their capital: time. Because their rate of return is generally consistent, a Saver’s primary mechanism to achieve wealth is to invest and wait. In fact, Savers often use The Rule of 72 to calculate long-term investment growth and plan their retirement. While passive investing is an almost surefire path to a comfortable retirement, it also generally means 30-50 years of work to get to that point.
Unlike Savers, Speculators choose to take control of their investments, and not rely solely on “time” to get to the point of financial independence. Speculators are happy to forgo the relatively low returns of a diversified portfolio in order to try to achieve the much higher returns of targeted investments. Instead of just spreading their money across stock funds, bonds, real estate funds, and a variety of other asset categories, Speculators are always looking for an investing edge. Perhaps they get a hot stock tip and try to cash in on the next Google. Or perhaps they hear about all the real estate investors who have made a bundle flipping houses, so they go out and buy the first run-down house they see.
Speculators recognize that they can have higher returns than Savers, and are willing to do or try anything to get those returns. They’re not scared to throw some money in an Options account and try their hand at derivatives trading; or run out and buy a bunch of inventory from a wholesaler they know and open up an eBay selling account. Speculators are always looking for the next great investment; for them, it’s all about being in the right place at the right time, and taking a chance on getting rich. If today’s investment doesn’t work out, there will always be another one tomorrow.
While the Speculator recognizes the potential gains from smart investing, he doesn’t always invest smart. He is very much a gambler, and while sometimes those gambles pay off, often times they don’t. And just like a gambler, the Active Investor’s biggest rival is the “vigorish,” the commissions and fees he pays to enter and exit all his investments. While the Speculator may have enough luck and skill to be a successful investor, he may show little or no profit after paying brokerage commissions, and other investing fees.
The third type of investor is the Specialist. Like the Speculator, the Specialist realizes that there is a more powerful investing strategy than just diversifying across a range of asset classes. But, unlike the Speculator, the Specialist understands that the key to successful investing isn’t luck, “hot tips”, or “being in the right place at the right time”; it’s education and experience. The Specialist recognizes that investing is no different than any other competitive endeavor — there will be winners and there will be losers, and the winners will generally be those who are most prepared.
The Specialist generally picks a single investing area, and becomes an expert in that area. Some Specialists deal in paper assets, some deal in real estate, and some start businesses. Unlike the Speculator who looks for the next “hot” investing area and the next hot market, the Specialist can make money in his chosen investment area during any market — hot, cold, or in-between. The Specialist knows his investment area inside and out, and instead of just entering and exiting investments, the Specialist has a plan.
In fact, having a plan is the key difference between the Specialist and either the Saver or the Speculator. The plan is the blueprint for achieve investment success, and with it, the Specialist can achieve huge returns with relatively low risk.
So, Investing Types is Correct?
Each of the three investing types clearly has its advantages and disadvantages…
The advantage to being a Saver is that you free to spend your time and energy on things other than investing, but in return you will wait a long time before you have the opportunity at financial freedom. Speculators have the opportunity to “hit it big” if they end up at the right place at the right time, but when they don’t hit it big, they often don’t even see as high of returns as the Saver. And while being a Specialist Investor requires the most time and effort, the rewards are the most profound – both in terms of control over income and the opportunity for financial success.
My 2 cents on this :
Savers Beginner Investors who are short of time should begin as Savers thereby begin investing in broad vehicles like Exchange Traded funds (ETF’s), Index Funds, Blue Chip Stocks on a monthly basis using Systematic Investing Planning (SIP) concept.
Speculators You need to understand the Risk Management and Money Management Concepts, have a grasp on price movements and understanding of Charts, you have to make decisions and should be independent in your thinking. And above all you should have the necessary emotional discipline and patience to withstand the roller coaster rides of the markets which are part and parcel of speculation.
Specialists Becoming a specialist requires a couple of years to grasp the skills in stock picking or successfully trend trading. In value based investing, Specialists do not diversify, they pick up undervalued stocks, invest huge sums in these stocks (typically 10-15% of portfolio) , have the conviction to hold on to the businesses for long periods of time until the market fairly values the stock before exiting (Sometimes the specialists never have the need to exit because the businesses keep performing well above the market. Here picking undervalued stocks and doing this consistently over long periods of time is where the true skills of specialists is tested. (eg: Value investors Warren Buffett, Phil Fisher, Rakesh Jhunjhunwala, Peter Lynch etc. ) In successful trend Trading, Specialists consistently develop systems and trade systems over periods of time and identify and ride trends (eg: george soros, W D Gann — famous for Gann Charts etc.) In either cases , conviction , discipline and patience is what differentiates the specialists from the speculators and savers.
So go ahead , decide where you want to fit, but start investing as a Saver if you are beginning investors before going on to become a Speculator or Specialist.
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