What Kind Of Investor Are You? This unconventional (and more than a bit irreverent) self-assessment test will help you identify your core investing tendencies.
(MONEY Magazine) – To be a good investor you need to know more than P/E ratios and profit margins. You need to know yourself. Are you brave or timid? A maverick or middle-of-the-road? Do you pay attention to every little move in the market--or could you not care less? The trick is to adjust your investing strategy to your personality. If you can whistle the theme to CNBC's Squawk Box, you might have the aptitude to do well as a trader--but you might also be overly aggressive. If you're too busy changing diapers and earning a living to pay attention to the day's winners and losers on Wall Street, you might be best off parking your dollars in an index fund. As you'll see in the accompanying profiles of five investors, the world of investing includes all types, from aggressive stock jockeys like Larry Perez to methodical value hounds like Bob Virgile and hands-full, hands-off mutual fund investors like Keith and Barbara Raymond.
Most so-called investor personality quizzes offer an endless succession of not-very-subtle questions, then rigidly slot you into categories based on your purported risk tolerance. Our quiz takes a broader and more playful approach. We realize that every investor is a unique snowflake, unlikely to fit neatly into any archetypes we can devise. Consider this quiz a tool to identify what tendencies drive your buy and sell decisions--and whether those tendencies are worth taking advantage of or worth trying to guard against.
PART ONE: CAN YOU TAKE IT?
Question: You're standing on the edge of the Grand Canyon holding a wad of cash worth $10,000. A sudden gust of wind rips the bills from your hand and you watch, helplessly, as they flutter to the ground below, where they're eaten by coyotes. How might you describe your mood?
A) Sad B) Bitter C) Wistful D) Elated; what a great view!
Answer: If you said A, B or C, you possess, to varying degrees, a healthy aversion to losing money. If you answered D, take all the money out of your wallet and light it on fire. Still feeling elated? I'm guessing not.
Investment risk is tough to grasp in the abstract. No one really knows how much they can stand until they've suffered a loss. A couple years back, lots of newbie tech investors convinced themselves that they had a limitless capacity for risk--until their portfolios imploded. The tech wreck may have cured investors of recklessness. But it also left many feeling a bit gun-shy.
Suck it up. You can't earn decent returns over the long term without embracing some risk. How much should depend more on your age and your goals than on your personality. If you've got time on your side, you can and probably should put a chunk of your portfolio into riskier investments, from tech upstarts to unloved value stocks. Of course, those on the verge of retirement shouldn't be gambling their nest eggs on penny stocks no matter how brave they are.
PART TWO: HOW MUCH DO YOU WANNA KNOW?
Question: A man with a tiny boat has to get across a river with a hen, a fox and a bag of corn. His boat is so tiny he can take only one at a time. But if he leaves the fox alone with the hen, the fox will eat her. If he leaves the hen with the corn, good-bye corn! How can the man get all his stuff across the river without anyone or anything getting eaten?
A) First the man takes the hen across the river, leaving behind the fox and the corn. He goes back and gets the fox. Instead of leaving the fox and hen together on the far side of the river, he brings the hen back. Then he takes over the corn. Then he goes back for the hen and--ta da!--everyone's over!
B) I'm sorry, what? I wasn't paying attention.
Answer: If you answered A, you're alert, logical and hung up on details. With stocks, you're probably an Obsessive. Go immediately to Investing for Obsessives below to see what type of Obsessive you are. If you answered b, you're, ah, whatever the opposite of Obsessive is. Skip Investing for Obsessives and go to Eyes-Wide-Shut Investing, at right, to learn whether you're dangerously tuned out.
INVESTING FOR OBSESSIVES
Most of the world's best investors are Obsessives; sadly, so are some of the worst. Which kind are you?
Question 1: When I'm wrong about something, I admit it right away.
A) Yes B) Sometimes C) Never D) I am never wrong about anything.
Question 2: In my spare time, I like to come up with "price targets" for my favorite stocks.
A) No B) Price targets are meaningless. C) Yes D) Yes. Would you like to hear about them?
Answers: If you answered A or B for both questions, chances are you can make good use of your obsessive tendencies. The best investors out there, from Warren Buffett on down, base their investment decisions on rigorous research (and rigorous scrutiny of balance sheets). But they're also willing to acknowledge their limitations and admit when they're wrong.
If you answered C or D for both, check your hubris at the door and watch out for these potential traps:
--Falling in love with a stock because you've researched it so heavily. This common tendency can lead you to hang on to your losers for too long.
--Assuming you have to act on your research. The more research you do, the more you'll be tempted to trade based on it. Don't.
--Confusing stock market spectatorship with real research. Knowing what semiconductor stocks are doing at 10:42 a.m. on a Wednesday isn't the same as knowing whether Intel is a good buy.
It's hard to be a great investor if you don't care much about the stock market--but you can be a good enough one. Let's see if you've got what it takes to be a successful Eyes-Wide-Shut Investor.
Question 1: Which of the following is a popular television channel devoted to stock market reporting?
A) CBS B) CNBC C) Comedy Central
Question 2: When a stock has a P/E ratio of 212, that means:
A) It's reached the boiling point. B) It is very, very, very expensive.
Answers: If you answered anything other than B for the above questions, it would behoove you to spend a little more time thinking about stocks. If you got these two right, you probably know all you need to know to survive in the market. Dollar-cost average into index funds and prepare yourself for some awesomely average returns. (Not that there's anything wrong with that.)
PART THREE: DO YOU NEED HELP WITH THIS QUESTION?
Question 1: When you have trouble with your computer at work, you:
A) Call the office computer whiz and have him fix it. B) Look through the manuals until you've found the requisite solution, calling in the computer guy only as a last resort. (He's just so condescending!) C) Hack into the computer's operating system and alter the code so it runs faster and better than before.
Answer: If you answered A, you generally like a lot of hand-holding, and you may well prefer to leave the gory details of investing to a financial planner or broker. That's a perfectly fine approach, but make sure that your planner is really working for you and not just for a commission. On the other end of the spectrum, there's the C type--the sort of person who reads the 10-K footnotes for fun. I'm guessing, though, that most investors would choose answer B: They know enough to get around, but they're willing to ask for help if necessary.
The biggest danger--to his own finances, at least--is the investing novice who fancies himself a stock market sophisticate. Unwilling to ask for help, he nevertheless seizes on "hot tips" with gusto, not realizing that any tip that's made its way down to him is probably pretty cold indeed.
PART FOUR: DO YOU BELIEVE?
Question: Do you know all the words to your school's fight song?
A) Yes, of course. B) No way! Are you crazy?
Answer: Some investors have a surplus of faith--in people, in stocks, in the unending march of progress--and others no faith at all. If you answered A, you're enthusiastic, supportive--and probably a True Believer. Go to True-Blue Investing, below, to see if you're a real Visionary--or just a Blurred Visionary. If you answered B, well, chances are good you're a Skeptic. Go to Investing for the Cranky, on the next page.
Some of the most successful investors ever are True Believers, Visionaries willing to invest in untested companies before the world catches on. Those who invested in Microsoft when it went public are gazillionaires today. Trouble is, a lot of True-Blue Investors are really just Blurred Visionaries who latch on to bad ideas or bad companies (and won't let go). So which are you?
Question 1: I invested in Dell and AOL in 1996:
A) Yes B) No
Question 2: When I first heard about Kozmo.com, the online delivery service, I:
A) Looked to see if they delivered in my neighborhood B) Signed up as a delivery boy so I could get in on the IPO.
Answers: If you answered A to Question 1, you might be a Visionary, you might be lucky--or you might be Bill Miller, manager of the Legg Mason Value fund, which has managed to beat the S&P 500 for 11 years running with the help of picks like these.
But even Visionaries have blurred vision sometimes; Miller bought Amazon.com at $80, and his fund is lagging the S&P this year. So even if you're convinced that you're as much a Visionary as Bill Miller, try to temper your faith with some prudence--and diversify a little.
If you answered B to Question 2, you clearly can't tell the difference between a brilliant idea and a crackpot scheme. Hand over the investing duties in your house to someone with a little less faith and a little more sense. (By the way, Kozmo never had that IPO and is now out of business.)
INVESTING FOR THE CRANKY
Sharp Skeptics can make a bundle on Wall Street. With their naturally contrarian bent, Skeptics can make good value investors, ignoring the popular stocks and searching out value in the names everyone else loves to hate. They're smart enough to sell when everyone else is buying--and to buy when everyone else is selling. But too much skepticism can lead to investing paralysis. Is yours a healthy skepticism?
Question 1: People are basically: A) Decent, if fallible B) Pathetic, insignificant fools! C) Out to get me.
Question 2: The stock market downturn of the past few years was:
A) A healthy correction B) Just the beginning of a 60-year bear market C) Of no consequence to me, since I live alone in a cabin in the woods with a sawed-off shotgun and a hoard of gold.
Answers: If you answered A to these questions, you're a healthy skeptic. But if you answered B or, worse, C, your skepticism is veering into just plain craziness. Try to rein in your paranoia and put some of your money back to work in the market. Markets usually go up, you know.