FOOL'S EYE VIEW
What Kind of Fool Am I?

By Stephen Bland (TMFPyad)
February 12, 2001

So ran the title of a song some years ago.

Most people around here know what kind of Fool I personally am, so I don't intend to dwell on that. I am suggesting people direct the question to themselves. I have often said that to be successful at investing you must first know who you are, financially. Not necessarily an easy thing to do, self-analysis, but this Freudian fiscal process is necessary I think for many people.

There are perhaps two classes of investor who may benefit. One is complete beginners who know not which style may suit them. The other is the kind of investor who may have some experience, but who never makes much money, profits from successful trades evaporating on losing ones.

There are loads of equity investing styles starting from, at its most basic, simply making regular monthly savings into a unit or investment trust fund, stretching up to daily trading of derivatives and similar high-risk approaches.

Going into the wrong style, quite possibly because you read about others making a success of it, is a recipe for disaster. There is no point in someone who lacks trading instincts trying to day trade options, for example. They will lose. Similarly, there is no point in someone who lacks any patience trying to be a value investor, and so on.

Hence the need for an honest assessment of yourself before you start. Or, if you are the experienced but unsuccessful type, a re-assessment is in order, because you may well be investing out of your depth. Doing things for which you are really not psychologically suited.

If you read the books about the great investors, one major common theme emerges about their success. I have written before that I do not believe it is likely that people can emulate these guys, evidenced by the fact that we are not all billionaires and most of us are not even millionaires or hundred thousandaires out of share investing.

But there is a common theme and it is this: all these guys developed strategies that worked for them and stuck with it for a long time. That, I am convinced, is the key to success. Finding a strategy that works for you then sticking with it, ignoring what anyone else thinks or how successful other players may be with their own techniques.

Equally, the key to failure is playing a strategy that does not work for you, possibly even scoring a couple of wins at first just to delude yourself, then making serious losses later.

I sometimes see certain regular readers around the boards, jumping from one strategy to something completely different when the first one starts to fail them, unable to concentrate or focus on what works, chasing the next faddish approach and losing in the end.

If, for example, someone decides that their strategy is playing small caps and penny shares, then that is fine as an approach provided they possess the skills to do so; the skills to minimise the risks, to go in like a pro only when the odds are as much in their favour as can they can be made to be. Yet loads of investors, mug punters if you like, try to play this game without the real ability that it takes. Investing out of their depth. Investing against their psychological profiles. A sure way to lose money, yet the success of others who perhaps do have the skills makes it look attractive, simple, easy. Not so of course. In fact to win at this particular high-risk game takes some pretty shrewd ability.

It takes a kind of brutal honesty to sit down, think about it, and say to yourself something like:

"I am no good at (for example) value investing because I will never have the patience to find the right shares and to hang on to them long enough if I do and I cannot be a contrarian. That is why I have been losing money at it, therefore I will give it up and find an approach which suits me."

It is hard to do this because people will observe others maybe winning at it and think they can do the same without asking themselves whether they possess the requisite personality traits to make a success of it.

I, for example, would be useless at trading derivatives, though the hot action of this game appeals to me a lot in theory. In practice though I know that I just do not have the necessary character for it. I would not try, no matter how many success stories I might hear.

So if you really want to be successful, find a strategy which suits you then go for it. Ignore what anyone else says about how risky, boring, impossible, etc. they may tell you it is.

Keep at it, ignoring apparently better strategies that work for others but not for you. Be single-minded about it: you will soon find out whether it is any good. And if it is, then compound your money in it, reinvesting everything you make if possible. You have to be able to believe in it, even through the odd failure that will arise, even through the risks that you running, for no equity approach is without risk.

Where Next?

Fool's Eye View discussion board
Investment Strategies discussion board
Investment Psychology discussion board