In your investing life you will meet different characters. This meditation describes the most common ones.
Type #1: The Nice Investor
A grand picture of the Nice Investor's family stands on his desk. It is a perfect image. It looks like the kind of advertisement you would see for a hygiene product. In the photo, the Nice Investor’s daughters are looking up, admirably staring at their Dad. His wife is well dressed and looks like one of the happiest creatures alive. But just as fake as the story the image portrays,so is the investment portfolio of the Nice Investor.
The Nice Investor's portfolio of stocks will include household names: Amazon, Apple and surely the common stock of Berkshire Hathaway, as the Nice Investor adores its founder. In short, the Nice Investor will invest only in companies welcomed and adored by Mr Market; companies show obvious signs of growth and momentum and that promise do no evil.
Yet when Mr Market devalues the Nice Investor’s choice of stocks, it is then when you see his true colors. While the Nice Investor is smart enough to know that true value lies in free cash flow (click here from a meditation on free cash flow), the Nice Investor will argue that EBITDA and its sister evil, adjusted EBITDA, should be the point of focus. To put bluntly: When capital markets tank, the Nice Investor starts to lie and cheat.
Type #2: The Self-Confident Investor
Whether you meet at 4:00 AM or 4:00 PM, the Self-Confident Investor looks the same. The Self-Confident Investor meticulously chooses the garments he wears, his white teeth are flawless and the color of his socks and belt are always in sync.
The Self-Confident Investor does not read, as he already knows everything there is to know. More than that, this type of investor class ridicules those who waste their time reading. And if history was all there was to the game of stock investing, the richest people would be librarians.
Often there is a material difference between the market value and the cost basis of the Self-Confident Investor. Read: The Self-Confident Investor is undeterred if Mr Market halved the value of his stock portfolio. We can only be jealous of his delusion.
Type #3: The Risk Taker Investor
When you visit the office of the Risk Taker Investor, you often see a powerful, inspirational quote on his desk or computer screen; “Go big or go home” is an example. Or “No pain no gain." And “Nothing great in the world has been accomplished without passion” is another. Rules are meant to be broken.
The Risk Taker will not answer your questions. When you will express a concern about his decision-making process, or willl question his rationale behind a stock purchase, the Risk Taker Investor will explain that rewards mandate risk. (Click here to read why I think the definition of risk by Wall Street is inherently wrong.)
Lying in the Risk Taker Investor’s bookshelf are typically marketing and self-help books. Whether it is Rich Dad Poor Dad or Who Moved My Cheese, the theme is the always same: how to achieve material success.
The Risk Taker Investor rarely has money invested in the advice he will subscribe to you. And in his portfolio of recommended stocks will often technology companies such as SnapChat and biotechnology companies, selling products that are pre-FDA approved.
Type #4: The Bargain-Hunter Investor
The Bargain Hunter Investor answers the phone without the aid of an assistant; he is never late for meetings and does not pretend to be busier than he is. Operating from a shabby office that was last updated in 30 years ago, the Bargain Hunter Investor will fill your pocket with cash and not with words.
There are diverse books on the bookshelf. From philosophy to world history; from biology to accounting; it will appear that the Bargain Hunter Investor has such a wide intelligence that he may be a professor of Impressionism or a linguistic professor whose focus is on the relationship between the language we use and how we understand the world.
Not only will the Bargain Hunter Investor welcome your questions and inquires but you will see that over time your comments and feedback have influenced how the Bargain Hunter Investor operates.
I do not know what portfolio of stocks the Bargain Hunter Investor will have, as they often change over time and are dependent on the mood swings of Mr Market. But a few traits are invariant: investment decisions are rationale and the stocks are unpopular, resulting in bargain prices.
A few examples: The Bargain Hunter Investor avoided technology stocks in the late 90s because their price exceeded value; the Bargain Hunter Investor refrained from buying real estate between 2004 and 2007; the Bargain Hunter Investor refrained from buying shares in companies that focused on Genomics and the Bargain Hunter Investor does not have a single bitcoin or crypto currency in their portfolio.
My purpose in this meditation is to draw a connection between how an investor conducts his life and the portfolio of stocks in which he chooses to invest in. I hope to have demonstrated that there is a direct relationship between our choices, actions and behavior.
I learned this lesson at the age of fifteen. At the time I professionally played tennis and was able to understand the person behind the racket in less than five minutes of game time. So next time when you visit your financial adviser, watch his book shelf first.