Just Be You

We all come into this world pre-equipped with natural tendencies. Our lived experiences may contour the edges of those tendencies but generally do not fundamentally change our predispositions.

The same is true with investing.

We all come to the world of investing with a certain way of thinking about how to make money. Based on our past investing experiences, we may slightly alter how we approach our portfolio. But we rarely change completely.

Over several decades of talking to investors, watching them, and advising them, I’ve decided there are four investor types. They represent the innate tendencies that are hard to shake for any investor. I’d like to explain how each investor type sees the world of investing through their own lens, and how their perspective can be helpful and harmful.

But first, what are the four types of investors? As I see it, they are the Safety Spotter, the Discount Hunter, the Momentum Chaser, and the Moonshot Seeker.

The Safety Spotter is nervous about the stock market – and most investments, in general. They hate taking risks that could involve losses, even if those losses are only temporary. If I had to venture a general worldview for Safety Spotters it would be, “I’ve worked hard for this money and it’s too valuable to risk losing.” They are perfectly fine with the trade-off of lower returns for the certainty of keeping their money together.

When the world goes crazy, Safety Spotters sleep tight. In fact, they revel in their cautiousness, believing slow and steady ultimately wins the race. The trouble with this investment approach is that things usually turn out okay, and their defensiveness causes them to build wealth slower than they otherwise would – or should.

The Discount Hunter loves a bargain. They scour through the unloved, the former high-flyers, the down-on-their-luck investments, hoping they will eventually turn around and regain their prior glory. And when these investments do, Discount Hunters will reap the rewards. There is probably a strong correlation between Discount Hunters and lovers of a good garage sale.

The first maxim of investing is to buy low. Discount Hunters take that advice to heart, buying only after investments are beaten up in value. This gives them a margin of safety. It’s better to buy an investment after it has already fallen by 20% than it is to buy before it does so. The trouble with Discount Hunters is that sometimes investments lose value because they are poor investments. Just because you find a soggy cigar butt with one puff left in it, doesn’t mean you found a bargain.

The Momentum Chaser loves what’s hot. They jump from investment to investment – whatever has done the best lately. Momentum Chasers hitch their wagons to the best performers from the recent past. They are essentially the polar opposites of Discount Hunters.

Momentum Chasers buy high with the hope of selling even higher. And oftentimes, that strategy pays off. However, from time to time, Momentum Chasers get caught when the investment winds change direction, and their high-flying stocks take a nose-dive, leaving them holding the bag.

And finally, we have the Moonshot Seekers. These are the risk-it-all bunch. They probably love buying lottery tickets, too. In their mind, one investment could change their life. They think, “If I would have bought Google, Amazon.com, bitcoin, or Nvidia 10 or 20 years ago, I’d be filthy rich.”

Moonshot Seekers can hit it big, and one amazing investment can transform even a modest purchase price into a tidy sum. The only problem is that most moonshot investments fail to outperform the general stock market. Moonshot Seekers should expect to lose on nine out of 10 investments. And that can work out – as long as the tenth one is a rocket ship.

Here’s the thing about the four investing styles. None is right; none is wrong. Investors have done well with all four. The big problem is jumping around from style to style. That’s when investors get burned. Each of these styles has a season. None of them work all the time, and as an investor you need to accept that.

So, just be you. Find your investing style and stick with it.