I have worked in several commodity brokerages, introducing accounts, and now
write books and newsletters in addition to running my own commodity brokerage. I
have probably introduced around 6,000 investors to trading over the years, and have
encountered a broad cross-section of investors. In his book “Beyond the Investors
Quotient” J. Bernstein puts the investors he has come across into categories. I have
done a similar exercise below, and tried to put investors into six main categories. They
are not etched in stone and some categories obviously overlap.
The Universe is governed by law There is a huge marketing campaign in futures trading
based around Holy Grail systems that are able to accurately predict future price movement
based upon scientific law. They normally claim fantastic results and yet will only cost
you a few hundred dollars.
Many systems are based around investors who are dead, and two of the most famous
are R. Prechter and W.D. Gann. These two are promoted by a number of books, courses
and software companies as two of the most successful investors of all time. The fact
that they are dead means that they cannot answer some basic questions like if they
were so good at predicting price movements, why did they not make much money? The
reality is, Prechter died a pauper and W.D. Gann, who allegedly amassed a $50 million
fortune, had to sell courses and books, as he could not support his family by trading.
When he died, his estate was valued at a modest $100,000. You will see all types of
scientific systems, many are based on astrology - how accurate are they - probably as
accurate as your horoscope.
It amazes me how people fall for this hype. Clients who fall for sure fire systems vary
from highly intelligent traders to newcomers. Alas, they don’t last long, normally the
first couple of trades shatter the illusion and it’s back to the reality of working for a
living. There are some good mechanical systems around however. Just like any good
trader, they suffer periods of drawdown.
The Educated Fool
Just like Jake Berstein, I have come across this investor numerous times over the years,
highly intelligent, knowledgeable, with a string of degrees and letters after their name.
The problem they encounter is they feel the application of knowledge is all that is needed
to make money. They create vastly complicated trading systems that look great, and
then totally collapse in the market place. These people cannot translate theory into
practice. They have no grasp of psychological aspects of trading and normally have
great problems admitting their approach is wrong.
It’s everybody’s fault but mine This person refused to take responsibility for his trading
decisions. If he makes a profit he shouts how wonderful he is, and when he loses he
blames everyone from his broker giving him bad advice, his wife and even the market,
which is acting illogically. This investor is normally insecure, unable to take responsibility,
lacks confidence, and exhibits a lot of emotion in trading.
The Opinion or Advisory Service Junkie This investor has found the secret of investing.
His logic is to get as many advisory services as possible and wait for them all to be
looking at the same trade. Several heads are better than one he concludes. Once he
has a trade that fits these criteria, he gains additional advice from brokers and friends.
This trader’s logic is awed in that if everyone is looking at a trade to go in a specific
direction, it will normally go the other way. This trader needs to study the theory of
contrary opinion. The old saying “if it’s obvious, it’s obviously wrong” applies to his way
of picking trades.
The Action Man
This investor likes to trade all the time, he loves the action. He will trade in and out of the
market continuously, rarely holding positions for any great period of time. This trader
normally has a reasonable understanding of market movements, but rarely makes any
money. He cuts his profits and eventually his losses and commission charges erode his
account. I have seen traders like this trade for five or six years every day, not making
money, yet still cheerfully trading.
The Inability To Pull The Trigger
This investor is one who has great difficulty in placing an order and there are far more
of them than you would probably think. Sometimes traders have a problem making
the first trade, and this stems from a lack of confidence. They’re always agonising over
the perfect trade to so, and end up doing nothing. It also happens after a losing trade,
confidence that was there goes. It’s like the skier at the top of the hill who has had a
bad fall and can’t go down again. The problem is, if you are afraid to go downhill, you
can’t be a skier. If you fear to trade, you should find another profession.
So far the above traders fall into losing categories, and represent the bulk, say, 90-95%.
The other 5% are all different individually, however, there are some points they all have
in common that are outlined below.
