Beginners Education: Have you got the right personality to invest?
THERE ARE EIGHT INVESTOR TYPES – ONLY TWO SUCCEED
It has always irked me that books with titles like “How to make a million dollars in the stock market” and “Ten things you must know about the stock market” probably sell more copies than my book. It’s my own fault, “Stock Market Secrets” by Marcus Padley is hardly exciting by comparison and let’s be honest, if they were really “Secrets” well, they’re not anymore.
But the get rich quick books do sell, presumably because there are a lot of financially anxious, unrealistic, desperate and frantic people buying books as a solution to their money problems, But if you think about it, in a sort of Catch-22 for get rich quick books, anyone buying that sort of book probably shouldn’t be responsible for money because anxious, unrealistic, desperate and frantic are hardly the right personality traits for a successful fund manager, and when it comes to investment success, personality is everything.
Give one hundred people one hundred thousand dollars each and ask them to invest it on a five-year time frame and, like the Parable of the Prodigal Son, come back in five years time and I can guarantee that apart from the people with zero who spent it, and those with exactly $100,000 who did nothing, there will be no two investors with exactly the same sum of money, which is odd when you consider that the market conditions were utterly identical for each.
The reason, of course, is that investment outcomes are not a function of method or approach but a reflection of personality. It doesn’t matter whether we all adopt the ‘intrinsic value’ approach, or trade on Gann principles, or use closing price line charts, or intraday candle charts, because every single one of us is going to do something different because we are all unique and every one of us is going to experience our own ‘special’ outcome.
Even identical twins will fare differently because each investment path is a very complex series of multiple micro-decisions, with varied outcomes based on actions and reactions dictated by genetics, personality and experience.
There will be as many investment outcomes as there are humans because humans are… human. They give in to the illogical, to hope, faith, bravery, courage, cowardice, confidence, belief, and conviction.
Because of that, and it has to be said, humans are not wired to invest. They destroy reason with emotion. Independence with bias. Maths with passion. None of us is Spock. We do not live on Vulcan. And thank goodness for that.
Imagine the stock market on Vulcan, operating on cold, unemotional logic, maths, and probability. No speculation, no guesswork, no assumption, just facts, with prices going straight to intrinsic value without pause. No trending. No charting. Just fact and price. A planet run by value investors. What a bore.
Thankfully then we are all stuck on Earth with other humans and their defective investment processes, processes that create a world of entertainment for investors which means an embarrassment of opportunities. It’s a lot more fun on Earth.
It’s a daring task, but Earth hasn’t given up trying to understand investor complexity completely. On Earth, we have these people called psychologists that attempt to apply logic in our space by breaking investors into groups and one of my favourite attempts to do this is contained in a book called “The Psychology of Investing” by Colin Nicholson in which Colin, an investor quoting a psychologist, helps us break down investors into general personality traits. The key to it is putting people into groups depending on how they handle uncertainty, or more obviously, risk.
In brief, the breakdown is that people come in three general temperaments each with two extremes including “Unpleasant” or “Pleasant”, “Arousable” or “Unarousable”, “Submissive” or “Dominant” and the eight various combinations of those three pigeon hole investors eight investment personality types, Exuberant, Dependent, Relaxed, Docile, Hostile, Anxious, Disdainful or Bored.
Turns out the Relaxed (Pleasant, unarousable and dominant) and the Docile (Pleasant, unarousable and submissive) are the most suited to investment success, and the rest, anyone unpleasant or arousable, are at a disadvantage.
Armed with this information you now have to take a good hard look at yourself and for that matter, your adviser. Are they aggressive or docile, pleasant or unpleasant, dominant or submissive, because, odd as it is, the traditional image of a successful “Wolf of Wall Street” “Bud Fox” type-A broker displays all the wrong personality traits for investment success because aggressive and unpleasant is bad, or in the words of the Desiderata, beware loud and aggressive people, they are vexatious to the spirit. And the bank balance it turns out.
All that shouting, swearing, phone slamming, rude, bad-mouthed, uncouth, belligerent, coarse, egotistical, crudeness is not, contrary to Hollywood generalisation, the sort of personality trait you want in an investor, or, if you use one, a broker.
What you want is someone laid back, reliable, emotionally stable, cool under pressure, someone with that Dunkirk spirit, the sort of person that goes to the running of the Pamplona Bulls and walks. Someone that is pleasant without being obsequious, agreeable without being subservient, and decisive without being overbearing.
Fortunately, this also describes the bulk of those patient, long-term investors that form the core of most full-service broker’s client bases because pleasant and patient people are psychologically suited to the stock market.
In which case, even if there has been a disturbance in the force, like the GFC, or the pandemic, you are probably going to be better off retaining your pleasant and patient temperament rather than attempting something radical and new. Being pleasant and patient may not have worked well in a bear market, but becoming loud and aggressive will accomplish even less.
So don’t change all you nice and pleasant clients out there. Your odds are much better if you can stay just the way you are. As for the rest of you. Are you sure you should be in the stock market?
Summary of Personality types. This is a quote from the Psychology of Investing by Colin Nicholson.
Exuberant people make very poor investors and even worse traders. They are a danger to their own financial health. Exuberant people tend to be gamblers who act on impulse. They will have no clear plan of what they are trying to do. They are simply seeking the thrill of the game. Investments that fluctuate a lot, and which call for many decisions, will see exuberant traders at their worst, as they react emotionally to every change in the situation, usually making inappropriate decisions.
Those with a dependent temperament also make poor investors. They tend to be unable to find ideas from the literature of investing, which may have led them to have thought out what they are going to do sufficiently thoroughly. They therefore never reached the stage where they are confident about what they are about. This leads them to be suckers for the Guru figures whose sometimes weird ideas are embraced and followed with almost religious zeal. Ultimately the Guru will disappoint them and they either swear off investing, or look for another Guru, repeating the process.
This is the ideal temperament type for an investor. They are similar to the disdainful in the way they go after their objectives in an organised, independent and persistent manner. The disdainful may have a slight edge in trading highly volatile markets. However, as investors, there will be little between them. The relaxed will tend to seek excellence in pursuit of high goals in every aspect of their lives. They will carefully develop a highly effective investment plan, which they will implement with great deliberation. They will tend to have a clear perspective on problems that arise, handle any stress easily and smoothly adjust their investment strategy to the unfolding situation.
These investors are quite likely dependent, except that they will tend to be less likely to seek and rely heavily on ideas from Guru like figures. They also have some of the positive qualities of the relaxed, because they tend to be calm in the face of adversity and to look for assistance when they need it. However, their submissive nature makes them more suited to working with an advisor or investment manager. They are naturally suited to carefully evaluating, and then sticking to, an investment program. This should ideally be slanted to stable, low-risk, positive cash flow investment vehicles, because of their lack of confidence under pressure.
This temperament type also makes for poor investors. In fact, only the anxious make worse investors. Hostile investors are unlikely to make any clear plan before they invest. When things go wrong, they react with anger, which makes it all the more likely that they will make poor decisions, leading to losses and missed opportunities. This is because anger distorts their perspective so that a reasonable reaction to adverse situations is unlikely.
These investors are the opposite of the relaxed. Stress is a real issue for them and can prevent them from acting rationally. In particular, the emotional rollercoaster they ride in investments will be impossible for them to tolerate. They will have a strong tendency to get out at the wrong time, simply to relieve the stress they are under. They will also tend to make mistakes because they panic when things go wrong for them. They are often dependent on relaxing substances and suffer insomnia when under pressure. It is best if they leave their investments to managers who choose stable, low-risk, positive cash flow investments for them.
This temperament type is not always the most attractive socially, but they have an excellent chance of making good investors and traders. They are the exact opposite of the dependent investors. Their dominance and self-confidence make them self-disciplined. In difficult situations, they can more readily than most people rely entirely on their own resources to reach independent decisions and carry them out successfully. In the emotional cauldron of highly volatile trading, they will tend to be calm and detached, able to rationally weigh up the alternatives and make difficult choices.
The bored temperament investor is the mirror image of the exuberant investor. However, it does not mean that the bored investor will be good at the craft. On the contrary, they will tend to be defeated mentally by the problems that loomed before them. They will tend to freeze and do nothing. This may see them simply not participate in investing, leading to professionals. This would be the best course to follow. If they do become involved the negativity and tendency to inaction will see them miss many opportunities to gain or to cut losses.