Individualism, investing and getting trampled by the herd

It’s hard to be a rugged individualist in the investing world.  So much is predicated on media hype and momentum investing.  It turns out that best results are typically produced by investors that are careful and confident.  One way to view this is via the BB&K Model:

Source: Bailard, Biehl & Kaiser

These researchers judged investors on two attributes, method of action (careful or impetuous) and level of confidence (confident or anxious).  The result was a framework that divided investors into 5 classes of people:

  • Individualist: careful, confident and often takes a do-it-yourself approach
  • Adventurer: volatile, entrepreneurial and strong-willed
  • Celebrity: follower of the latest investment fad
  • Guardian: highly risk averse and wealth preserver
  • Straight arrow: shares the characteristics of all the above equally

It shouldn’t be surprising that the individualist performs best.  Much of the collective tradestream is made up of celebrity adventurers, pumping and jumping on every new stock or fad.  Many of these momo guys make a lot of money, until they don’t.  It’s important for investors to be able to dissociate themselves — to unplug from the tradestream — for a period of time to rationalize their motivations for investing in general and in specific securities in particular.

Do we need to be in the stock market at all? Are we trying to play defensive or opportunistically?   So many times we meet with clients with existing, large portfolios who don’t know why they’re investing.  Like so many other things in life, if you don’t know why you’re participating, you probably shouldn’t be.  The stakes are too high, the noise too loud and the gravitational force of trend chasing just too strong.

For those independent enough to withstand all the pernicious hamstringing behaviors unaware human investors display, it’s a lonely path, long and winding.  But, like most valuable pursuits in life, worth the effort.

Learn more

We’ll be discussing more about this and other essential traits for stock pickers in an upcoming Tradestreaming Radio episode with Jim Valentine, author of a great new book, Best Practices for Equity Research Analysts: Essentials for Buy-Side and Sell-Side Analysts