There are two types of investors which are listed below. Both types of investors follow different plans. These plans are laid out in more detail in the book “The Intelligent Investor” by Benjamin Graham. For the sake of saving you time so you don’t have to read the 580 page book, we will cover most of the key points in what the differences are between the two types here.
- Active Investor – Invests actively, researches and picks his or hers own stocks and watches those investments closely.
- Defensive Investor – Invests passively, does not care about price of the stock, does not care about the market going up or down and does not watch his or hers stock very closely. This approach favors more diversification or owning multiple companies across something such as a Index Fund rather than investing in an individual company.
So as you can see the active investor follows a more SHORT TERM approach and is exposed to way more RISK. This type of investor is usually more acceptable to losing money because he or she can afford to lose that money. They are gambling in a sense, like one would do at a casino. The money being invested towards the investment is 100% in that one investment only, which is where they are exposed to more RISK but are also more likely to get higher returns faster. People with personality types that have a higher tolerance to the amount they can lose on an investment typically are more active investors. Some might refer to them as Day Traders or Speculators. MORE RISK/MORE REWARD.
The defensive investor follows a more LONG TERM approach and is exposed to less RISK but also aren’t as likely to get really high returns in the short term. These type of investors are more conservative on the amount they are willing to lose and also typically ARE NOT just invested in one single company which exposes them to less RISK and offers protection in case one stock price declines rapidly on them. Some might refer to these people as “in it for the long haul”, a true investor. LESS RISK/LESS REWARD.
Which type of investor are you?
So now that you have more clarity on the different types of an investors out there, the next step is to find out which one best suites your personality or which one you can be. The easiest way to determine this is to pretend you have 10,000.00 to invest. Lets say you are trying to trade a stock and the trade goes against you. Let’s assume that you don’t have an exit strategy in place yet either.
- You lose 1,500.00 within say an hour or 2, are you okay with this loss?
- Is the 10,000.00 you originally started with, money that you CAN’T afford to lose because you need it for something else?
- Is the money paying for expenses to live in case you lose a job or is it part of a security fund for emergencies?
If you answered NO to question 1 than trading for short term profits is probably not your best choice for playing a stock. If you answered YES then you can proceed to question 2.
If you answered YES to question 2 you should probably look at something with less risk like an index fund or DON’T invest AT ALL until you can afford to lose the money. If you answered NO then continue to question 3.
Question 3 would follow the same logic of investment decision making as question 2. If you answered NO then your personality is likely a good fit for day trading or buying and selling a stock for the short term.
Preparing for the short term trade
Now that you know your personality type, the next step is preparing for the psychological aspect of keeping your emotions under control as you watch the stock price and the timing of exiting the trade. If you are a more long term investor don’t worry this part is probably not for you however you may want to read on because this is useful information for you as well, for investments you may or may not make later on when you have your long term investments or your security investments taken care of and you want to get into growth investing.
This is by far the hardest part and we will not be able cover the whole topic here. We will be sure to cover this in more technical detail later on with Stop Losses and knowing how brokers work later on. So continuing on….
The hardest part of this mental battle is not selling yourself short on profits but also not staying in for too long and losing too much money. It’s a catch 22! So what I like to do, is write down what my buy in price will be and what my sell price will be. What my buy in price will be before the stock starts going up and what my sell price will be if the stock goes down. Doing this will take a lot of the doubts and stress of worrying (the emotions) out of the equation that come along with the trade.
If in doubt get out!
The last part we will cover here is having conviction in your trades. Most types of investors will tell you that 80% of trading is psychological while the other 20% is mechanics. Another wards, ONLY 20% of it is in technical analysis and fundamental analysis of the markets, timing and entry and exit positions for day trading. If you are not familiar with these terms technical analysis and fundamental analysis, don’t worry we will cover these at a later time as well.
Just know that once you have purchased your stock and are locked in a trade that there is no going back on your decision at that point. Have confidence in your decision because if you don’t, chances are that the trade will go against you. It’s comparable in the mental aspect to say someone who always thinks they are going to get robbed. If they are always thinking they will get robbed, guess what? They are subconsciously putting out signals with out even knowing it, that they want to be robbed and that is usually what they will attract, is a robber who will be glad to rob them.
So just remember…. if in doubt and your locked in the trade you might want to consider just getting out even if you are at a loss. It’s better to take a small loss so you can catch the next trade rather then lose big and NOT be able to play another trade again.
If you want to share your knowledge on trading and the different components that go into the process of setting up a successful trade, by all means please feel free to comment. These are just suggestions and my way of setting up a trade is not the only way or the ONLY way to trade a stock.