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Want To Know What Type Of Investor You Are? Then Come On In

Are you unsure of what type of investor you are? Fret not. Here’s a little exercise which can help you discover the type of investor you are and in the process, find out which investing style might suit you the most.

First, let’s go through some common styles. The list I provide below might not be complete, but it’s still useful. So, common styles include:

1)     Finding high growth companies – or what might be called a “Rule-Breaking” style of investing

2)     Finding companies which are unloved or unknown but which have hidden value – let’s call this a “Hidden Gems” style of investing

3)     Finding high quality dividend shares; such a style is commonly known as “Income Investing”

4)     Finding undervalued shares with a wide margin of safety – that would simply be known as “Value Investing”

A “Rule-Breaking” type of investor might be attracted to companies such as Sarine Technologies Ltd (SGX: U77) or Silverlake Axis Ltd (SGX: 5CP) due to their high growth rates in recent years and their potential for yet more growth. It should be noted that “Rule Breakers” might have to be comfortable with severe price volatility over the short-term.

Share Growth in profit in last four completed financial years
Sarine Technologies 115%
Silverlake Axis 116%

Source: S&P Capital IQ

Meanwhile, investors who enjoy searching for “Hidden Gems” might consider companies such as Genting Singapore PLC (SGX: G13) or Neptune Orient Lines Ltd. (SGX: N03) as possible investment targets as both firms are generally unloved by the market now; Genting Singapore has fallen by more than 40% in price since October 2010 while Neptune Orient Lines has declined by around 55% in the same time.

Moving to the “Income Investing” group, these investors would generally prefer high-yielding REITs or dividend power-houses like Starhub Ltd. (SGX: CC3) or Singapore Telecommunication Limited (SGX: Z74). Both telecommunication companies have stable businesses and yields which are higher than the market average.

Lastly, an investor belonging to the “Value Investing” group tend to perform intrinsic value calculations on companies he/she is interested in and would only make a purchase if there is a sufficient margin of safety attached to the share price of a company. Given the presence of a margin of safety, “Value Investors” tend not to see their investments behave in a volatile manner, unlike the “Rule Breakers”.

So coming back to finding out what type of investor you are, here are a few questions you might want to ask yourself – my responses are given in italics and might serve as an example of how to approach these questions.

1)     Do you need cash flow?

Response: In my current situation, I do not require cash flows from my investments to sustain my lifestyle.

2)     How well can you handle volatility?

Response: I generally prefer to see every one of my investments trading in a reasonably stable price range and I might get worried if I see my investments fall by more than 50% in price.

3)     Are you comfortable investing against the crowd?

Response: I am quite comfortable investing against the crowd and do not feel the need to seek approval for my investment theses.

4)     Are you highly disciplined and able to follow a well-defined system?

Response: I prefer to have a well-defined system I can follow instead of relying on subjective opinions to make my investing decisions.

From answering these questions, I can deduce that I am a “Value Investor” who might also enjoy the occasional “Hidden Gem.” You can try out this exercise on your own as a starting point for discovering what kind of investor you really are.

Foolish Summary

What I have described above  is a good exercise for you if you’ve just started out investing and want to know what might be a suitable investment style for you. However, you should also note that investing is a fluid process and an individual would tend to switch styles as they grow as an investor.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Stanley Lim does not own any company mentioned above