Also see https://www.portfoliothinktank.com/are-you-a-trader-or-an-investor/ For a helpful trader introspection to help become the best you can be.
The importance of introspection for investors is an underserved topic. Many of the biggest market inefficiencies are derived from behavioral economics which is simply the composite of individual investors actions, reactions and emotive decision-making.
Wartime CEOs are capable of making hard decisions fast and can rapidly pivot in the entire company. As Reid Hoffman puts it Masters of Scale – Sometimes the CEO needs to leave fires burning. Wartime investors have the temerity for this.
Peacetime CEOs are good about putting companies in balance with internal and external constituents; investors, employees , customers and their whole ecosystem. Peacetime CEOs optimize efficiency. Peacetime CEOs act with prudence that would make any Bank Trust officer proud.
So let’s take this peacetime-wartime concept and now apply it to investors.
It’s pretty clear who the peacetime investors are: Peacetime investors own passive index funds. Peacetime investors have a financial plan and a financial adviser who calls them a few times a year. With many exceptions, peacetime investors are the financial advisors. The are endowment trustees, conservative family offices and the directors and managers of virtually all defined benefits programs. Sidenote:
A defined benefit program is getting phased out so I’m obliged to add a definition, instead of the 401K which is replacing the defined benefit program where you put in the amount of money this is called a defined contribution plan a defined benefit plan was what your father may have had and where their company promised some income for life upon retirement. This is the defined benefit in the company took the responsibility and the risk to achieve the financial returns necessary for all of these compensation packages. companies are seldom willing to take this risk anymore, having passed the risk to the employees with their own defined-contribution plans such as IRA and 401K accounts.
Peacetime investors care about making sure that their index fund is the cheapest. Peacetime investors rebalance their portfolio.
Peacetime investors’ greatest skills is that they are not their worst enemy. They don’t have to worry about their emotional reactions wrecking their money because they’re not really in the game on a day-to-day basis. Peacetime investors have reaped big gains from some of the longest bull markets in economic history combined with capitalization weighted equity indexing strategies and low interest rates. This has allowed passive investors to claim victory over active investors….for now.
Who are the wartime investors?
I used to be surrounded by wartime investors when I was on the floor of the Chicago Mercantile Exchange.
Most hedge fund managers are wartime investors. Many tactical investors are wartime investors. Market makers are usually wartime investors. Day traders are often wartime investors. Even if you’re not very good at it.
Traders love volatility.
Back in the 80s it was the pork belly Futures Trading pit that had the most volume. It was not because pork bellies are the most important or valuable commodity, it was because they were the most volatile. Traders love volatility. It has always been this way and it still is. I’m looking at you Mrs. Bitcoin investor. Traders need volatility to make more money. Back when I was a floor trader, I would usually set a daily goal to reap 70% of the daily range. The bigger the daily range, the greater my profit opportunity.
Crises engender volatility.
So if Traders love volatility and crises engender volatility, do Traders love crises?
Yes. Wartime investors love a good war.
If your inner investor gets excited – not afraid, by a crisis – you are a wartime investor.
By knowing yourself better you give yourself a chance to match an investing strategy that is tailored not just to your risk profile or some big objective, but to your mentality and decision-making. The advantage of doing this can be significant. In fact, the more active you are as a trader, or investor the more important this becomes. It is easy to be objective and emotionally distant from your money when your check interval is low.
Here are some examples how investors can better match their strategies to their personality type:
- Patient people can take a longer-term investment horizon.
- Detail-oriented people can tune their risk management and exit strategies in light of the possibility of greater conviction in an investment resulting from their more in-depth research
- Intuitive people can have faster-moving investment strategies that capitalize on the stream of consciousness and rapidly adapt to a changing environment.
- Thrill-seeking investors can practice high-concentration, high diversification strategies with systematic risk management.
- Cautious people can construct portfolios for reliability, consistency and decreased volatility.
Impact on Investment strategies, portfolio design and systematization:
Both wartime and peacetime investors can have systematic strategies. Each investor type can benefit from setting the rules to their Investment Policy Statement that they are likely to follow. Sometimes the strategy requires repair. All systematic investment strategies can be adaptive. These adaptations allow investors to continue to protect themselves and setting the scope for adaptations based on knowing your investor type can be a big asset.
James’ professional orientation points at the zenith (and sometimes nadir) where technology and investments intersect. He is a Fintech entrepreneur and has served twenty years of a lifetime sentence.
James is a patented inventor, quant pioneer and investment manager. He is the founder of Gravity Investments, a unique investment and technology services firm centered on James’ inventions for diversification measurement, optimization, visualization, and analysis. In the development of the platform, James has pioneered A.I applications, diversification attribution, down-side diversification, portfolio re-optimization, full-lifecycle strategy optimization, programmable investment policy statements and core-satellite optimization techniques.
In working with advisors, funds and money managers as both a strategic sub-advisor and software consultant, James has consulted and trained hundreds of professional investors on portfolio design and optimization. James has a unique ability to look at any investment process and find practical, intelligent and often quantifiable opportunities to improve the investment product.
Inspired by the work of Nobel Laureate Harry Markowitz and the efficient frontier, James has championed and pioneered the science of diversification. James’ technology has advised
or assisted in over 30 Billion dollars of investor capital. His vision of a more perfect investment management system is at the heart of Gsphere ( www.gsphere.net )
His passion for performance, curiosity for the unknown, and drive to excel empower his service to investors.
James is Founder and CEO of Portfolio ThinkTank (the B2C company) www.portfoliothinktank.com, Founder & Chief of Financial Engineering at Gravity Investments www.gravityinvestments.com (the B2B company) and Chief Investment Officer at Gravity Capital Partners, a wholly owned SEC Registered Investment Advisor.