This article is an excerpt from the upcoming book "The Zen Investor's Guide to Mastering the Tradecraft of Investing."
Part 2: If you want to become a Master Investor you must be able to answer this question: Who Are You? (to see Part 1 click here.)
The Hookah-smoking caterpillar from Alice in Wonderland asked Alice: Who Are You? "I'm Alice" she replied. But the answer the catepillar was looking for was much deeper than that. "Who are you, really? Deep down inside, what motivates you, what makes you tick, and what are you expecting to find in this Topsy-Turvy world at the bottom of the rabbit hole?"
Alice didn't know who she was on a deeper level. But she was looking for answers. She wanted to know what was happening, and what the meaning was. I think that's what most amateur investors want to know. How does one make sense out of a seemingly crazy and sometimes upside-down world of the stock market?
In the world of the stock market, we have our own Mad Hatter, played by Jim Cramer. We have a tea party, where regular guests include hedge fund titans, flash boys, short sellers, front-runners, and other members in good standing from the League of Extraordinary Predators.
We even have a Red Queen, in the form of our activist Federal Reserve, who are quick to step in whenever there is misbehavior in the market. The Red Queen wants to make sure that every participant in the stock market knows who is in charge.
In the stock market version of the fable, Alice is an innocent, well-intentioned amateur investor who just wants to navigate the confusing underworld of the investing rabbit hole, and come out with more than she started with. She means no harm to anyone, but anyone can indeed cause her harm by taking advantage of her innocence and lesser skills.
Let's Get Real
Coming to an understanding of who you are as an investor is one of the most important requirements for mastering the tradecraft. Accomplished investors are constantly examining their assumptions, looking for clues that might reveal misperceptions or biases that could hurt their performance. It’s hard work for most, because it requires introspection and radical honesty. But I can guarantee you that going through it will make you a better investor.
A few important questions
What are your core beliefs & assumptions about investing? Do you see the stock market as a casino, where you can make a few big scores and leave town a winner?
Are you intimidated by the sheer complexity of the market? Do you feel as if you’re grasping at straws when it comes to making investment decisions? Or do you think you are smarter than the market, and those other chumps don’t stand a chance against your superior skills?
Are you an organized thinker? Are you willing to take the time to plan out your investing strategy? Are you quick to move from an idea to a trade, with little or no reflection or analysis in between?
Where do you get your information? Do you only use one or two sources, or do you do a wide review of various opinions? Do you limit your research to sources you tend to agree with, or do you go out of your way to find opposing points of view?
Are you gullible, or skeptical? (I’ve yet to hear a client admit to being gullible.)
Are you biased in your thinking? If you said no, you’re automatically disqualified, because everyone is biased. I’m biased, Warren Buffet is biased, and so are you. We couldn’t make it through the day without bias-driven shortcuts.
Here’s the key question: Are you willing to examine the biases in your thinking when it comes to making investment decisions?
How do you react to big market declines? Do you tend to hit the sell button first and ask questions later? Do you remain calm and patiently wait for the market to recover?
What motivates you to invest in a company? Is it instinct? Gut feeling? A tip from an associate? Careful analysis? Mimicking some popular investment guru? You like and buy their products? They are in the news a lot, and the news is always good?
To help guide you in your quest to find out who you are as an investor, I have created a list of common investor types. This is not a comprehensive list, and your investor type may not appear on it. Your type may be (probably is) some combination of the common investor types on my list.
It’s not my intention to Pigeon-hole you into a specific investor type, but rather to offer ideas that you can use to put together a composite of your true investor type.
Next time on Tradecraft...
We will take a look at the various approaches an investor can take, and try to match his or her natural skills to the approach they are taking. We will look for mismatches, which can cost an investor dearly over time.