Don’t be a Brother-in-Law Investor

What motivates an investor to buy or sell a particular share? A US fund manager investigated this question, and came up with five categories...

3 May 2003

Investment Research Group

• Brother-in-law investor
  
  Brother-in-law investors rely on the advice of other people to make their decisions, sometimes reacting to tips they find in the financial press. This is the most unsuccessful strategy because of the way information reaches the market. First the “insiders” react; people close the company with a good idea what’s going on. Then “smart money” starts buying – sophisticated investors with effective research methods – and lastly when all the information is already incorporated in the share price, your brother in law calls.
  
  
• Technical investor
  
  Technical investors were once called chartists because their central activity was making and studying charts of share prices. Nowadays this is usually done on a computer where advanced mathematics combines with grunt power to unlock patterns they hope will carry into the future. The technical analyst is trying to predict where the herd is heading next. This method is out of the question for most ordinary investors, as it requires technical knowledge combined with having a great amount of time on your hands.
  
  
• Economist investor
  
  This type of investor bases his decisions on forecasts of economic parameters. A typical statement is "The dollar will strengthen over the next six months, unemployment will decrease, interest rates will climb -- a great time to get into bank shares." The problem for these investors is that what economists say will happen, often doesn’t happen. Economic forecast is an extremely tricky business, as is share picking, so good luck to anyone who tries to do both!
  
  
• Scuttlebutt investor
  
  This approach to investing was apparently pioneered by US analyst, Philip Fisher and consists of piecing together information on companies obtained informally through wide-ranging conversations, interviews, press-reports and, simply, gossip. In his book Common Stocks and Uncommon Profits, Fisher wrote: Go to five companies in an industry, ask each of them intelligent questions about the points of strength and weakness of the other four, and nine times out of ten a surprisingly detailed and accurate picture of all five will emerge. Fisher also suggests that useful information can be obtained from vendors, customers, research scientists and executives of trade associations. For this approach, you need an enquiring personality, great networking skills and a lot of time on your hands.
  
  
• Value investor
  
  Value investing is the name given to the method of deciding on individual investments on the basis of their intrinsic value as contrasted with their market price. A general definition of intrinsic value would be "that value which is justified by the facts, e.g., assets, earnings, dividends, [and] definite prospects, including the factor of management." This is a highly respected form of investing, but requires some knowledge of financial analysis. Those who do acquire that knowledge, and start to apply it successfully are to some extent freed from the heart stopping volatility of the market, because their perspective is very long.
  
  
• Conscious Investor
  
  This type of investor overlaps the five types above. They do the fundamental research of the value investor, talk to any insiders they can find, and then time their buying and selling with last minute reference to the technical charts. This approach may be the hardest but it can also be the most rewarding and certainly an improvement on listening to your brother-in-law.
  

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