The psychological profile of a successful investor

The interesting thing about investing is that individuals with a totally different outlook on the market can be successful. Bulls and bears of gold, stocks,bonds, commodities, etc can all simultaneously make money, or all simultaneously lose money.

The reason for this is their psychological approach to markets. In the 1970’s Merrill Lynch found that the majority of their clients were losing money during the bull phase of the market. They did not advertise this too widely. Those were the days before online trading so I will let you guess why.

The late great Robert Beckman who was the greatest bear trader since Jesse Livermore considered the psychological profile of an investor to be of paramount importance. He lived a very flamboyant lifestyle in the sixties to nineties in London although originally from New York. He loved fancy cars, fancy clothes and fancy food and wine and dated women at least 20 years younger than himself which was not as common as it is now. He was the most expensive personal financial adviser in the world. He charged $5,000 per hour then, at least $20,000 in today’s terms. When asked why, he said, “I just want to be left alone. Those who can think, can get the same information by subscribing to my reports for $150 per annum.” Many subscribers made returns of a few thousand per cent on the Eurobond warrant market, which no longer exists. Sadly I was not one of them as I did not have much capital in those days.

Bob maintained that there were people who should not go near the stock-market in the same way there are people who should not go to Vegas or pass a liquor store. In the 1970’s when his Old English sheepdog, William, started making excellent returns on the stock market, making more than £100,000 over seven years it attracted attention. He claimed that he would read out company names, and “if he barks at one of them, I invest in his name”. The press inevitably dubbed it a “wags to riches tale”. The Inland Revenue’s attempt to claim a slice of the profits — unsuccessful as long as none of it was spent — added to the appeal of the story.

When asked to explain why his dog was a better investor than most of his clients, he explained, “He does not stick his nose into things he does not fully understand.” Bob devised what he called the Stock Market Temperance Test (SMTT). I lost all his reports on a failed computer (no Dropbox in those days) and for thirteen years have been unable to get a copy of the fifty or so questions and their scoring. I do remember just a few which I will reproduce.

1. My father is/was a good man. Y/N

2. What is your attitude to having a mistress?

     a) I would love to have one

     b) I would not dare

     c) I have one and it’s wonderful

3. What is a convertible hedge strategy?

I cannot remember any more in detail unfortunately. The higher the participant's score the better investor he was likely to be. (In those days less than 1% of Bob’s subscribers and audience were women.)

For question 1 a ‘Yes’ answer scored 0 and a ‘No’ answer was 5 points.

The first time I did the test I was off to a flying start. The tendency of seeing our father as ‘good’ without thinking means that we are not objective. Most people are flawed. To be a good investor you need to be objective and not emotional.

For question 2, answer ‘a’ scored 0, ‘b’ scored 5 and ‘c’ scored 10 points.

Most men will fantasize about having a mistress but when it comes to investing fantasy is useless. Those who said they would not dare knew their limitations. If you don’t know your limitations you can suffer big losses in investment. Finally those who had a mistress defied convention and were risk takers which you have to be to some extent to succeed in investment.

In question 3 a convertible hedge strategy is the practice of shorting a stock and buying a convertible bond which is exercisable into that stock. It allows you to profit sufficiently but not as much as a naked short but protects you if your short goes the wrong way. I scored well on the test. There were many other questions to test temperance and knowledge.

Those who scored poorly were warned that speculative capital markets might not be for them. As we mentioned before if you have psychological weaknesses and self-destructive tendencies the stock-market may not be the place for you.

Bob was the last of a now dead breed which made all their money trading using only his own capital alone and without funds from commissions unlike today’s ‘gurus’ who are savvy businessmen but not great investors and traders.

Most people think they can handle great risk but in the final analysis they cannot. Stock market profits are indeed like sex and nobody is really getting a lot more of it than you are.