Sunday, August 10, 2008

What Type of Investor are You?

I've been out of the stock game a little longer than I have wanted to be due to competing priorities.  However, I've finally been able to put a lot of that under control and I am now looking around trying to figure out what I'm going to buy.  The hiatus I took was probably a good thing.  The market has been ugly for most investors.  Not only has it gone significantly down, but it is extremely volitile with up 2% days followed by down 3% days.  It's almost impossible to buy something and not feel a little uneasy.

Given the fact that I need to warm back up, I've given a lot of thought to the type of investor I am and the type I want to be.   At it's simplest level, most people probably fall into one of three categories.

  1.  Index investor - This is the simplest type of investing and the one most appropriate for the majority of people.  The strategy is simple.  You don't have time to figure out which stocks to buy, so you buy them all.  It used to be that the best way to do this was to buy an index mutual fund that tracked the market.  The best of these were from the Vanguard Group founded by the index investor guru, John Bogle.  You can now do this almost as easily through various ETFs like the SPY which track the market but work like stocks.

  2. Growth Investor - This is the type of investing most people think about when they think about getting rich with stocks.  Can you find the next Wal-Mart,  Microsoft, or Starbucks before anyone else?  This is the category of stocks with the most explosive upside potential.  You can find stocks that have returned 100x or even 1000x for their investors.  If you find one of these, you can be set for life.  This is the investment strategy of such notables as T. Rowe Price and Phil Fisher.  However, there is a catch.  Growth stocks, for all their explosive upside, also have explosive downside.   Sooner or later, too many people pile into a stock.  Eventually, the bottom falls out, and it is a free fall for these stocks.  If you get in at the top and don't get out fast enough, you are screwed.

  3. Value Investor -  Who wouldn't want to pay $0.20 for a $1 bill?  This is the philosophy behind value investing.  Sounds easy right?  It isn't.  It is perhaps the hardest way to invest.  Why?  It's against human nature.  Buy low and sell high sounds easy in practice, but when the stock is running in the opposite direction you want it to, human nature makes you do things that don't make logical sense.  People like Warren Buffet make it look easy.  History has even shown that value investors outperform growth investors.  But its hard.  Take now for example.  Nobody wants to buy financials.  People are avoiding it like the plauge, and for good reason.  While they are beaten down, they can easily go further.  Worse, a lot of these companies will go to $0, wiping out your total investment.  But if you have the courage, and can find the right stock, the returns can be fantastic.

Now, I've liked to think of myself as a Value investor who occasionally looks for growth.  So far, my track record hasn't been the best.  In any case, I'm probably going to do a little bit of all three.  I recognize now that I don't spend the time I should pouring over the stocks like I should before I buy.  If I attempt to trade in this environment, I will get crushed, no doubt about that.  So for now, I'll probably look to play some ETFs and try and play the market.  Market still has a ways to go down, I have no doubt about that.  But picking bottoms is very hard, so it might be best to just pick a buying point and go in.