Are you ready to start investing money into the stock market?
We’re all unique, and as such, the investment strategy that works for me might not work for you. So how do you find what works for you? Your stock market investing strategy should do the following:
- Fit your personality.
- Fit your strenghts.
- Stay away from your weaknesses.
Let me use myself as an example here.
- I’m a pessimist. My teachers in elementary noticed that I always see the dark side of things.
- I’m a scaredy-cat (dare I say so myself). When I was a toddler, I would walk with my knees bent. That way, if I fell, I wouldn’t be badly hurt.
- I’m a plunger. I believe in Yoda’s words “do or do not, there is no try”. Once I set my mind on something, I go all in until I achieve that goal. But if I’m not 100% convinced, I can be stubborn as a mule.
- I’m cheap.
My pessimism makes me a great investor when it comes to avoiding the proverbal herd over the cliff. Whenever I see the market entering a crazed mode, I say “whoa, this is getting too far, I’d better sell out now”. As a result, I usually sell well before the market has peaked. In addition, my scaredy-cat and cheap attitude prevents me from taking excess risk when I see it, such as buying when I already know that the market is overbought.
My plunger attitude towards life makes me a swing trader – when I have a strong conviction, I’ll commit 100% of my portfolio towards the investment, and when I’m not 100% sure, I don’t do anything until I’m convinced.
My Strenghts & Weaknesses
- I love human-related studies. including psychology, history, economics, politics, and philosophy. On the other hand, hard core academic studies such as mathematics and higher level sciences always bore me to death.
- I’m a big picture person. I’ve always been good at understanding the big picture.
- My IQ is above average, but not by much.
A big picture person (when it comes to investing) needs to understand the factors that truly drive the market: political policies, economic fundamentals, and investor psychology – all of which I love studying. My barely-above average IQ prevents me from being a quant, who needs to be a genius at mathematics. As a result, I’m a macro investor.
Studenomcis has explored how the stock market works.
If you need help deciding what investment strategy fits you, I compiled a list of investor profiles and the different kinds of players involved in the stock market:
To borrow a quote from Liar’s Poker, “you’re a trader. Just trade! Don’t try to get intellectual with the markets.” This is typical of a day trader – you need to have a good feel for the markets, and that’s all you need. Day traders need to be highly sensitive about small details:
- Sensitivity allows day traders to pick up on things that most people won’t. For example, just by looking at a screen a day trader can feel the market’s soft spots when you won’t. After he’s pinpointed the market’s weaknesses, he will try to profit from the market’s weakness.
Summary – what you need: sensitivity to numbers.
Macro investors (like myself) need to think about the big picture as opposed to the smaller details. We need to be good at understanding human motives – afterall, humans are what drives the market in one direction or another. While we can forego the smaller market movements, we realize that ultimately, the big factors are what will drive the market’s trend.
What you need: the ability to step back from the frantic market and take a big picture point of view and forego small profits.
Technical investors are the inbetween of quants and macro investors – they incorporate a little bit of both. Technical investors use mathematical models that are built to reflect human psychology to invest in the markets.
What you need: understand human psychology and have a good grasp of numbers.
Quants are purely numbers-based investors (reminds me of nerds) that really try to understand the stock market. They’ll sit behind a computer all day, punching in numbers that look like something from Back to the Future, and develop a complex model with a bajillion different variables to invest in the markets.
What you need: an insanely high IQ (no kidding) and a great understanding of mathematics.
Trend followers (as the name suggests) follow the trend. Their goal is not to anticipate the trend, as macro investors must do, but to get into the trend when it has become obvious. However, trend followers also try to avoid being too far behind the trend.
What you need: the willingness to follow the crowd.
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This was a guest piece from Tony, a young macro investor.