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Före detta hedgefondförvaltare, partner och VD på Futuris som utsågs till Årtiondets hedgefond i Europa för perioden 2000-2009
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Trader or Investor? Choose wisely, padawan

Reading time: 10-15 minutes

Main topic: Introspection, self-reflection

Sub topic: 10 Investment/trading types - which one are you (really)

Bonus: Ex ante hindsight analysis, before smashing into the fan

Trader padawan dark side ambitious and rushed trader or thoughtful investor
Trader or thoughtful Investor?

Altruist's dilemma

Have you heard of the reverse prisoner's dilemma?

Every second day, I walk to and from the gym on a narrow cobblestone path. It only fits one person at a time, or possibly a couple walking very closely together, in effect holding on to each other.

Right next to the path, on both sides, are irregular stones with gaps between, that are both difficult and dangerous to walk on - and hurts the feet even with shoes on.

Whenever two people meet on the path, both parties typically step to the side and walk past each other on the dangerous, stony side surfaces.

Both cooperate and both are worse off

Very rarely, a young kid or an old and decrepit person stays his course on the smooth cobblestone.

I know I could easily hold my ground on the path, but never do.

This is not a story about altruism; it's about being aware of the world, analyzing it, discerning more or less useful patterns and making conscious decisions as a consequence.

It's about knowing who you are and what context you act in. So...

 

What kind of an investor are you?

You may be a veteran and knowing both the market and yourself inside out. Or, you might be more or less new to the stock market game, making your strategy up as you go along.

No matter if you have decades of experience or just getting started, I would recommend systematically going over your investment style to see if it fits with your personality traits and natural talents.

Investing and trading is a lot like computer programming, weight lifting or consciousness. There are many levels of complexity not apparent to the untrained eye. Nested coding, self referential pattern repetition in gym periodization, and interest rates entering an investor's equations from all sides.

These concepts and more (including Bach's fugues, Escher's impossible pictures and Gödel's incompleteness theorems) are explored in depth in the wonderful, Pulitzer prize winning tome "Gödel Escher Bach" by Douglas Hofstadter. Keep that idea of increasing complexity and intertwinedness in mind as you browse the following (non-exhaustive) list of market strategies and the quality requirements of their agents:

10 investor types

  • HFT (High Frequency trading)
    • Financial power (in order to buy the fastest equipment there is)
    • Statistical genius for creating unique or fastest trading rules
    • Political clout (to avoid transaction costs, market abuse allegations etc)
  • Algo (HFT, MFT or LFT)
    • Unique insight into market dynamics; have to outsmart thousands of other algo traders
    • Strategy for changing market characteristics
  • Day trader
    • Experience (market "feeling")
    • Discipline (stop losses are essential)
    • Always on
    • Long/short unbiased (to survive bear markets)
  • Swing trader
    • If you don't have time to be a day trader
    • If you lack short term market feeling
    • If you lack the patience or analytical skills of an investor
    • If you're feeling lucky
    • This strategy sounds a lot like a loser strategy for all those that didn't have what it takes for the other strategies. And yet, this would be my strategy of choice, if I wasn't a long term, independent/contrarian fundamental investor
      • N.B., I'm not bad mouthing anyone or any strategy. If it works, it works. But does it, really?
  • Situations
    • Connected (to hear about and understand situations like mergers, acquisitions, product launches etc)
    • Up to date (on "everything" - no situation happens in a vacuum)
    • High loss tolerance (when a situation back fires)
    • Smart sizing strategy (to keep dry powder even after a few misses in a row)
  • Earnings
    • Analytical (to outsmart hundreds or thousands of analysts trying to work out the next quarterly earnings and understand what other analysts and investors think and how they are positioned ahead of the next report)
    • Statistical/Mathematical (for finding new leading variables and combinations of variables in order to predict sales, earnings and others' predictions)
    • Second level thinker (new product launches or rising earnings aren't enough, the question is what others are expecting)
  • Buy and hold
    • Extreme loss tolerance (draw downs in bear markets are gruesome)
    • Extremely detached (must be able to withstand pressure to sell when all the muppets are screaming at the bottom of a market cycle)
    • Extremely patient (If I'm right and a new bear market is just getting started, in 2016 or 2017 stock markets will be back at levels they first reached 20 years earlier)
    • Can't stand seeing the neighbors become richer (if the worst thing conceivable is watching your neighbor buy cars, boats and jewellery for a few years during market peaks, you must Buy And Hold to guarantee you ride the market all the way up (and down again)
    • This is not really a strategy, but it kind of works anyway, for extremely dispassionate and pathologically long-term people
  • Asset diversification
    • The so called Quattro strategy
    • Curiosity (there are many other asset classes than stocks, many other markets than your home market, and you have to be interested enough to find them, compare them, and put together your own pizza pie of investments)
    • Willingness to do some digging for annual portfolio re-alignment
    • Moderate personality; not impatient or greedy
    • This is the ultimate winner strategy - it doesn't take super human or inhuman qualities or financial muscles. If you are a moderately curious and patient person with average finances, the quattro will keep making you a little better off every year, and probably keep pulling ahead of the energizer bunnies burning out on exertion and risk in most other strategies.
  •  Fundamental long term investor
    • Patient (Markets swing wildly between extreme overvaluation and extreme undervaluation. If you keep buying once stocks get a little cheap and keep selling once they get overvalued, you'll always feel over weight in troughs and under weight at peaks, but over time you'll avoid the BAH-investors maddening highs and lows, while producing at least the same average returns
    • Analytical (You have to do all the work yourself to know when a stock or a market has strongly positive or negative return potential)
    • Mathematical (you do the math!)
    • Independent (contrarian) - sometimes you should run with the herd, sometimes against it. That takes a very unusual personality - rarely possessed by people with many childhood friends.
    • Couldn't care less about peers or neighbors ("The Joneses bought a convertible, so what?")
  • Dice thrower
    • Happy-go-lucky
    • Devil-may-care
    • Doing it for fun
    • No analysis or research whatsoever
    • Sometimes trades on tips, sometimes on news, trends or whatever
    • Wastes money on commission but do about as well as any ape would - not too bad, but spends unnecessary amounts of time on performing a little worse than an index

 

Taking stock

Can you honestly say you possess the required qualities? Or could the harsh reality be that you are a fair weather trader that had a bit of luck during the last 6 years' bull market?

What if you are impatient, loss-averse and not very analytical; a simple Buy The Dip trader with no real strategy or competitive edge? What if the moderate quattro is what really suits you best, but you are stuck in day or swing trading (due to beginner's luck, and no desire to put in real work), or erroneously assume you'll be psychologically and financially strong enough to hold on throughout a bear market trough?

 

My five cents on identifying your inherent investor traits

Go through your profits and losses. How did they come about. How did it feel? What if that near miss had been an actual miss?

Does your strategy or stock portfolio entail a single point of failure? Could something happen that would derail your lifestyle? Do you remember when drug lord Escobar had the luck of all the evidence against him burning up, since it was kept in one single, "safe" place? That was a single point of failure (SPOF) on behalf of the District Attorney.

Try this thought experiment: You have lost a lot of money. Assuming that has already happened, analyze how it happened and what to do to prevent it. Be creative.

Do you think low interest rates warrant higher asset prices? Day after day?

Then you are cooperating with central bankers who try to push up prices in order to kick start the market, and they are cooperating with you by keeping rates lower for longer, since all buying power is going into assets instead of consumer prices. Consumers postpone wage increases thanks to the wealth effect from houses and stocks.

The dance continues until it reaches a breaking point with collapsing asset prices and a sudden rush to cash, demand for higher wages to compensate for losses and rush to consumption when cash and wages eventually spark inflation.

Just like on my cobblestone path, all parties more or less unknowingly cooperate with each other, but everybody becomes worse off in the end. Faith in central banks will plunge, asset owners will lose money (albeit fake and inflated), consumers will suffer through a stagflation.

 

No harm no foul

As long as you know who you are, what kind of an investor you are, what your life is about, all the above is inconsequential for you. As long as you have matched your personality, your talents, your strengths and weaknesses to the actual threats and opportunities - and adequate targets - you'll be okay.

Assuming you only participate in games where you have an edge (analytical, financial, psychological etc.), or games with only winners (quattro) and have set your targets in a self-aware manner, I'm sure you'll come out on top.

 

Be careful what you wish for

As I advised a friend this summer, point targets are for losers and incremental strategies are for winners.

Aiming for retirement, financial independence or any such thing that depends on the final outcome is moot. Unless you enjoy the incremental progress, the journey in itself you're highly unlikely to enjoy the end game even if you get there (and truly hate yourself and your life if you don't).

 

Summary - be you, not a Jones

Are you a trader, an investor, analytical, patient, truly interested and capable, or do you just want to make some easy money?

Think carefully about what actually drives you, and match your traits to your portfolio (and life) strategy.

Avoid creating a single point of failure (in your life, as well as in your portfolio)

The end result of life (became rich, made it to old age) should only matter marginally for your total happiness compared to your appreciation of the process of getting there.

Investing is really complex and difficult. Take that to heart and think about what your competitive advantages are - or if you should choose a semi-passive Quattro strategy instead

Don't silently "cooperate" by default; be independent and honest - at least to yourself. Remember that no Jones likes being beaten by another Jones. Just as it is street smart to let oneself be convinced by the other party in an argument, complementing on their wits, you'll be more liked if you don't keep up (ahead of) your neighbors than if you do.

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Och om du är svensk ska du förstås lyssna på min podcast "25 minuter" (t.ex. på Soundcloud) som idag (9 november 2015) handlar om just att hitta sin talang. Glöm inte att prenumerera på kommande avsnitt i iTunes, Podcast Addict, Podcaster, Downcast mfl plattformar.

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