If you work out your personality type, your goals become obvious and you can invest according to your archetype.
I did a personality test once. There are as many shades of personality as there are people, of course, and to make any sense of something so complex, the analysis had to generalise, which meant pigeon-holing us all into categories.
This particular stockbroking firm’s personality test broke us all down into four basic types based on four basic patterns of behaviour. They labelled them ‘excellence’, ‘analysis’, ‘harmony’ and ‘action’. They branded me as ‘high action’, but they were looking for someone more ‘high teamwork’. It’s the stockbrokers that Macquarie rejects that make Macquarie the best.
Another personality generalisation is used in the famously popular book ‘Surrounded by Idiots’ by Thomas Erikson. The book interestingly classifies personalities into colours: red, yellow, blue and green. Each colour has its own traits and once you have identified your colour, the book teaches you how to interact with the other colours. I’m a red, apparently. I’m “fast-paced, a risk taker, purposeful, driven, strong-willed, high energy, competitive and rational”. I am also “impatient, intolerant and overbearing”. You get the idea. I find all the other colours so slow!
And so we come to investors. After 41 years in the stock market, I can tell you, there are different ‘colours’ of investor as well. I, too, have generalised and have identified five. Let’s take the lead from Thomas Erikson and call them, in order of risk tolerance: white, green, blue, yellow and red.
White
If black is the absence of any colours, then white is a mixture of all the other colours. Whites represent the huge tail of investors that sit in industry funds and large retail super funds and pay their investments almost no attention at all. Yet. Whites are the spawning ground for all the other colours. At some point, they may migrate to something more colourful, but for the moment investment is little more than something they watch someone else do through their super fund’s website.
Green – The market timer
This is the least volatile, safest approach to more active investment. This is what I will do when I retire. Greens do one thing to help themselves. They time the market. Contrary to the self-serving industry mantra that you can’t time the market, you can, and we have proved it.
At the time of writing, our market timing fund has returned 20.32% in the past 12 months compared with the S&P/ASX 300 Accumulation index’s 0.81%. During this time we have sat in cash for 120 days without a break and we have also caught the AI boom using US market-focused ETFs.
Timing the market involves exploiting the market averages in a bull market but being prepared to exit sometimes, when the stock market hits the headlines for the wrong reasons. This is an approach that is logical, because it is sometimes in cash, less risky than the average ‘always long’ equity fund.
The goal for the green investor is to catch the bull markets but avoid the corrections by being just a little bit more vigilant. Amazingly, even the white investors can do this without any change in structure at all. All they have to do is occasionally change their asset allocation on their big fund website.
We time the market using ETFs, all of which are traded on the ASX. That gives us exposure to all sorts of international as well as domestic sectors and markets and we use that to good effect.
Blue – The income investor
Blues are the biggest group of active investors. They are analytical, sensible, often retirees and many – or is that most, or all – are focused on income. Blues are the nest egg ‘preservers’, a nest egg that is big enough to service their income requirements but needs management.
They commonly invest in an obvious group of around 20 mostly large, low-volatility, individual shares and pick those stocks for their income, franking and sleep-at-night character. They buy ‘quality’ stocks that are generally large and reliable and will be around in 10 years.
The Blues don’t want to be disturbed all the time by the market or their stocks. These are the set- and-forget investors (yes, there’s nothing wrong with that) and success for them is to finish the year with the same amount of capital they started with, having lived in the meantime. A good year for a blue is finishing the year with a bigger nest egg than they started with. And blues are experienced – they don’t spend more in a good year. They know there are bad years. They’ve been around.
Yellow – The growth chaser
Yellows are the nest egg ‘growers’ or the ‘accumulators’ as the tax legislation calls them. Yellows are usually pre-retirement (although a lot of retirees do this as well), are still working and are looking to grow the nest egg. Because they have a job and don’t need income, the yellows can afford to take a bit more risk.
Yellows want to set and forget and be long-term but, unlike many blues, are prepared to sell when they make mistakes. Their target is capital growth, not income, and they do that not by trading, but by focusing on stocks that have a high return on equity and low payout ratios. That requires a bit more reading and research and a lot more vigilance.
To match their higher-risk appetite, they are likely to have an expanded skill set that stretches beyond fundamental analysis to the understanding of technical analysis, including charts, trends, signals, support and resistance, and other signposts that allow them to exercise their rare ability to sell when they get it wrong. Success for a yellow is to grow the nest egg by 10% a year or more.
Red – The trader
This includes people from any stage of life and they come from all the other colours. Contrary to popular belief (the popular belief of the whites), this is the smallest, not the largest, group of active investors.
Any investor can trade. Many blue investors trade on the side, allocating x% to trading while keeping the bulk of their money (the nest egg) invested in a lower-risk, less-active, more formulated and rigorous process.
Reds come in all shapes and sizes and include the whole spectrum of competencies, from loud-mouthed gambling idiots to highly skilled, disciplined and experienced professional traders. Unfortunately, the loud-mouthed gambling idiot is the most assumed persona of the trader when it is, in fact, the most insignificant group of investors in the whole market, possessing, as they do, the shortest half-life. Most investors start out as traders and mature into something less stressful.
Stick to what is relevant.
So, the question you have to ask yourself now is, “What colour am I? And in what percentages?”
Work that out and investment becomes simple, your goals obvious, and you can stop wasting time absorbing everything rather than what is relevant.
In fact, if you adopt a colour for long enough, you will eventually work out that not only does every colour have its own modus operandi, it has its own list of stocks and, as an active investor, you needn’t bother with the rest. What could be easier than that?
