As we have consistently pointed out to our subscribers and wealth management clients, investing can never be an exact science. Experience and judgment are just as essential as fundamental analysis in successful investing.
That’s also why a balanced temperament is so important. It can keep you on a steady course and help you avoid losses. It can also help you avoid investing strategies that narrow your chances of success.
One way to judge your own temperament for investing is to take a quick survey of investment approaches to see what works best for you.
Consider these three common investor mentalities. Do any sound familiar?
Statistical bears. These overly cautious pessimists lack imagination. When doing their own investing, they zero in on a handful of statistical measures — earnings, dividends, the length of time the market has been rising and how much it has gained. If they see any sort of resemblance between today’s figures and those of past market peaks, they assume stock prices are headed for collapse. It’s a mistake to narrow your field of vision when stock investing. Statistical bears take it to extremes. They’re a little like the 19th-century engineers who studied bumblebee anatomy and concluded that bees simply could not fly, according to known laws of physics. The laws of physics never change, but our understanding of them continually expands. That’s also true of our knowledge of stock investing.
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- Starry-eyed bulls. These optimists have too much imagination and too little caution. They accept or develop overblown ideas of the potential of each new stock they invest in, or indeed of the market as a whole. But they neglect to consider what can go wrong. Having invested too heavily themselves, they try to get friends and relatives involved, as well.
Skeptical optimists. Experience tells these investors that it pays to take an optimistic view, but to temper it with hard-edged skepticism. These investors study market indicators and statistics, but see them in light of changing accounting rules, as well as trends in interest rates and the economy. They do sometimes get excited about junior stocks, but they recognize that new or unproven companies involve extra risk. After all, mineral finds are valuable because they’re rare, and technological innovations face heavy competition.
Above all, skeptical optimists recognize that they are investing in a company, rather than an economy, a mineral find or a product. We think you should follow their example. Focus your stock investing on companies that make money, pay dividends and serve customers well. In the end, these are your surest signs of a successful investment.
What’s more, if you recognize yourself in the third of these mentalities, it’s likely you have the kind of balanced temperament that will help you succeed in investing.
COMMENTS PLEASE—Share your investment experience and opinions with fellow TSINetwork.ca members
When you see a debate between bulls and bears on the state of the stock market, do you tend to favour one side over the other, or do you take a different point of view? Let us know what you think.
