To Thine Own Self be True

Now, if one could only figure out just who that self really is . . .
Author:
Publish date:

Derrick Niederman, The Inner Game of Investing, John Wiley & Sons, 1999, 198 pages, $24.95

Many people subscribe to the belief that investors are born, not made. They think there is a cookie-cutter personality type and, if they don't fit it, that they will never be really good at investing. But, as Derrick Niederman points out in

The Inner Game of Investing

, nothing could be further from the truth.

"...Investment success (with a specific stock) isn't limited to any one personality type," writes Niederman, "and if that's true for a single stock, it's emphatically true for the market as a whole... as long as we forge a strategy that is consistent with who we are."

Niederman, who has been in the investment business since 1982, comes by this wisdom honestly; and he presents it with a short, humorous and deft book that is well worth reading. An MIT math Ph.D. turned securities analyst and business writer, he is the author of numerous articles as well as two other books. For those who believe that wisdom comes from being well rounded, note also that Niederman is a former national squash champion, and a Life Master of the game of duplicate bridge.

Niedeman writes that there are seven types of investors, each corresponding to a specific investment strategy. They are, respectively:

  • Bargain Hunters -- value investors
  • Visionaries -- growth investors
  • Contrarians -- those looking for turnarounds
  • Sentimentalists -- believers in enduring franchises
  • Skeptics -- short sellers
  • Traders -- short-term opportunists
  • Adventurists -- speculators

Niederman devotes a chapter to each, and incorporates a checklist of five questions so that readers can define themselves as one of the seven main types. All are relevant, some even humorous. Consider one of the questions meant to determine if you're a Trader:

"Do you cringe when the newspaper reveals a stock that got away from you?"

As Niederman explains: "Traders especially don't like to be left out of that sort of thing."

Or consider the question he uses to determine if you really are a Contrarian -- perhaps the most overused characterization in the investing field:

"When you scored big on IBM's turnaround beginning in 1994, did it annoy you that so many other investors shared your gains?"

Explains Niederman: "Contrarians rarely like company."

The qualifying questions are followed by a discussion and examples of each strategy's key benefits, and drawbacks. Niederman tells us, for example, that the finest example of contrarian investing was buying

Chrysler

in 1981 and selling it in 1987 at a 2,500% gain; or paying $4 for

USAir

in 1995, and selling it in 1998 at $70.

He also cites the contrarian's achilles heel:

"Contrarians cannot bring themselves to buy the stock of popular companies, no matter how strong the investment case may be."

This is as true as the fact that skeptics can't believe brokerage house recommendations -- no matter how solid the reasoning -- because brokers are so obviously skewed to selling stocks to the investing public.

Niederman's approach here is a more lighthearted -- and ultimately more effective -- attempt than that of Peter Tanous in his recently-reviewed

The Wealth Equation. But it, too, has its limitations -- rooted in the methodology's very simplicity.

For example, none of the seven investor personalities can be said to always correspond to their associated investment strategy (i.e.-- visionaries are not always growth stock buyers). Nor can many investors truly define themselves by way of Niederman's seven personality archetypes. One reader may find that he is part Visionary and part Sentimentalist; another that she is part Bargain Hunter and part Contrarian. The trick is to identify components, in order to create a realistic composite.

What is left unsaid here, of course -- as with so many of these exercises in self-diagnosis -- is the difficulty most will have facing up to their real inner selves. The self-described Contrarian may in fact be most comfortable swimming with the crowd. So,

caveat lector:

What you discover about yourself as an investor may not always make you happy.

But it will make you a better investor. At which point you'll simply have to console yourself with the motto of many a successful Wall Street pro: That no amount of happiness can buy money.

Desmond MacRae is a New York-based freelance journalist specializing in banking, finance and investments. He is a regular contributor to Managed Account Reports, Global Investment and Plan Sponsor. TheStreet.com has a revenue-sharing relationship with Amazon.com under which it receives a portion of the revenue from Amazon purchases by customers directed there from TheStreet.com. TSC selects books for review solely on the basis of merit for its readers.