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Investor Types to Avoid

The permabull uses all of the right buzzwords, his patter is polished, his manner impeccable. By the time he's done with his bullish sales pitch, you're reaching for your checkbook -- and historically, big trouble.

Some of the permabulls used to be on TV a lot. One in particular was a frequent TV guest, extolling the virtues of the Goldilocks economy and the ever-rising bull market at Nasdaq 5000. Then the bottom fell out, taking the Nasdaq down a mere 80%. He never changed his tune the entire way down.

On the flip side are the permabears, of which there a few classic examples. They've been bearish for as far back as I can remember. They may have avoided the drop from Dow 11,000 to 8,000, but they've been waiting for that drop ever since Dow 3,000.

Avoid these broken clocks like the plague.

  • The Exotician: The more obscure, the better: that's the motto of this creature.
  • Fascinated by exotic charts and little known indicators, the exotician changes methodologies as often as he changes his underwear.

    Flitting from style to style like a butterfly, his enthusiasm for the esoteric merely masks the lack of conviction he holds for his previous theory.

    Last week it was a combination Bollinger Bands and McClennan Oscillators. Before that it was Elliot Waves. This week, its MACD and Fibonnaci. Next month, it's the Kondratiev Long Wave theorem.

    It's not that these techniques don't have value, but the exotician simply can't seem to stick with any one long enough to test their validity. The exotician is on a futile search for the magic elixir -- which, unfortunately, does not exist.

  • The Know-It-All: I love listening to people talk about stocks at cocktail parties. One of my favorite players is the guy who knows all the obscure details on a company: When they were formed, who sits on the board, the model numbers of new products, all sort of useless minutia. At his fingertips is an unholy checklist of data, all of which is completely irrelevant to the investment process.
  • This is especially true with tech companies. Their products are complex and ever-changing; the networks they sell into are even more complicated. The technical attributes of their products are way beyond the comprehension of the average investor whose VCR clock has been flashing "12:00" since 1994.

    Actual language overheard at a barbecue [in the summer of 2004]: "Wait till you see the new 2200 dynamic cross circuitry router -- it's going to kick Cisco's (CSCO) ass."

    Now, I'm pretty tech savvy: I hooked up my own TiVo (TIVO), and I can swap out a hard drive or add RAM by myself. But comparing the technical attributes of high-end switching equipment, and then doing a cost benefit analysis of the technical advantages of that product line (relative to the rest of the marketplace for that equipment) is far beyond my expertise.

    I'll wager it's beyond your ken also.

    Be wary of these characters. They remind me of the kid in grade school who couldn't hit, throw or field, but he memorized the stats of all the players on his favorite baseball team.

    Folks like that often lack an appreciation for the game. It's no different with investing.

    This column was originally published on April 19, 2005.

    Barry Ritholtz is the chief market strategist for Ritholtz Research, an independent institutional research firm, specializing in the analysis of macroeconomic trends and the capital markets. The firm's variant perspectives are applied to the fixed income, equity and commodity markets, both domestically and internationally. Other areas of research coverage also include consumer, real estate, geopolitics, technology and digital media. Ritholtz is also president of Ritholtz Capital Partners (RCP), a New York based hedge fund. RCP is driven by the analysis performed by Ritholtz Research. Ritholtz appreciates your feedback; click here to send him an email.
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