What Kind of Investor you are? In the book ‘The Intelligent Investor’, Benjamin Graham has described two types of investor- Defensive Investors and Enterprising investors. Following is their description by Graham:
“We make a basic distinction between two kinds of investors — the “defensive” and the “enterprising”.
The defensive (or passive) investor will place his chief emphasis on the avoidance of serious mistakes or losses. His second aim will be freedom from effort, annoyance, and the need for making frequent decisions.
The determining trait of the enterprising (or active, or aggressive) investor is his willingness to devote time and care to the selection of securities that are both sound and more attractive than average.”
The Intelligent Investor (By Benjamin Graham)
Although a lot has changed between Graham’s times to the modern investment period, nevertheless the type of investors has remained the same. Even in this modern time, there are two types of investors- an active investor and a passive investor. However, there is also a lot of room between active and passive investors where a many investors reside in today’s world. Let us now discuss the key qualities of all these investors.
A passive investor is ‘buy and hold’ investor. Typically, the holding time for these investors is forever. They buy a stock and then forget it for a very long time. Sometimes these types of investors may face huge occasional losses because of ‘recessions’ or ‘market crash’ which they are not aware of as they are not actively involved.
For example, during the 2008 market crash, many passive investors did not take their money out of the market and hence their investments suffered huge losses.
However, for a long run, these investors turn out to be winners. The 2008 market crash recovered after 2 years and those who remained invested for long time turned out to be the victors in the end.
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An active investor is a day trader. Day traders buy and sell the stocks throughout the day to get profits. As they as actively involved, they are awarded great profits throughout the day.
However, these investors incur many frequent charges due to a large number of transactions. In addition, day trading can also be very stressful, as these traders have to devote lots of time in the active trading.
Fortunately, there are many people whose investment style lies in between those of an active investor and a passive investor. These people are not day traders but are actively involved in the market.
Typically, What Kind of Investor you are depends on three factors. Time, preference and knowledge.
Factors determining what kind of Investor you are:
Let us understand this with an example. Suppose you are an employee, have a family &kids. You love to travel and party with friends. Then it is very unlikely that you will be able to give a huge amount of time for investing. You might choose a passive investment strategy. This will give you lots of time to remain actively involved in your personal and social life.
Now, let us take another example. Here, you are highly interested in stock market and you give plenty of time for your investment. Then, you fall into the category of an active investor.
However, these are not the only scenario possible for the investors. For instance, say you are willing to give 5-10 hours per week for your investments. Then, you lie somewhere between an active and passive investor.
This is based on your inclination towards the market. Some people are highly interested in stock market and prefer to give all their free time in analyzing the stock market. Then they are actively involved.
However, if you enjoy having a party in your free time instead of reading the market news or economic times, then you are passively involved. In this case, you do not think about your investment during these times.
There is also a third possibility based on the preference. Suppose you like to party in your free time. Nevertheless, during the party, you also like to discuss the prices of the stocks and its trends with your friends. In this case, you are again somewhere between an active and a passive investor.
How much knowledge you have also influenced your style of investing. If you are new to investing and do not have enough knowledge, you may be inclined to passive investing. However, as you gain more knowledge, you may prefer to get more actively involved in your investing.
Overall, the style of an investor can be defined by considering the amount of time he has, his desire and preference towards investment and his level of financial knowledge. These three factors can help you determine how actively or passively you are involved in your investment.
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