3 Types of Investors – Which Type Are You?

I see 3 main types of investors today; each with their own characteristics and results. The first lets their emotions cause them to make really bad investment decisions; usually these people eventually quit. The second voluntarily decides the best they can achieve is average performance, with the result being good results in bull markets and poor results in bear markets. The third type of investors attempt to control their emotions and increase allocations when asset valuations are bargains and decrease allocations when asset valuations are high.

Let’s look at the 3 types of investors:

The Buy High, Sell Low Investor

Many investors find themselves buying when everyone else is buying and selling when everyone else is selling. It’s imbedded in our culture; including momentum investing. It’s embedded in our DNA; we like to be validated by other people’s actions. This is represented by the investor who listens to the media, culture, and lets their emotions cause them to make bad decisions.

This result is these investors far underperform the market averages because they buy at above average prices and sell at below average prices. In other words they buy high and sell low.

Often these people become disillusioned, and some even bitter, believing the market is rigged when it was actually their own doing.  Most often these people either quit or eventually lose much of their money.

The Value Investing Investor

The Value Investor attempts to buy investment assets far enough below their intrinsic value as to provide a margin of safety. This requires hard work, research, and an ability to not let the culture tell you what to do. Therefore it is more difficult than it might appear.

Related Reading:
Intrinsic Value and It’s Relationship to Margin of Safety

The fact is most bear markets are preceded by excessive valuations. Most bull markets are preceded by bargain valuations. That is why investors need to have a flexible asset allocation that allows them to change their allocations based on the probability of success.
Value investing should not be confused with market timing. Some investors make investment allocation decisions based on charts, momentum, or various market indicators. This is called market timing.

Value investors make allocation decisions based on price and value. Some of us call this valuation timing. Purchasing assets for less than their real worth lowers risk and increases the probability of higher than average returns. It also makes sense that purchasing assets for more than their real worth increases risk and decreases the probability of lower than average rates of return.