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Know Thyself: Take My “Tech Investor Personality Test”

19 | By Michael A. Robinson

In Platos Republic, protagonist Socrates takes the Delphic aphorism Know Thyself as his personal motto.

It’s a great motto … especially for investors.

As a market veteran of many years, I can tell you that this is one of the biggest weaknesses most investors have.

They dont know themselves …

I watch as folks take losses and miss out on profits – mistakes they could have easily avoided if they’d only taken the time to know their investing personalities just a little bit better.

So today I want to demonstrate how to transform yourself into the “Socrates of High-Tech Investing.”

It’s easier than you’d think.

And the profits you’ll reap will make it well worth your time.

It Ain’t No Rorschach Test

The whole “Know Thyself” philosophy is actually the basis of modern psychotherapy. In that realm, knowing thyself can involve quite a bit of very sophisticated analysis and testing.

But we’re not talking about “ink-blot tests” here.

Indeed, when it comes to investing, knowing thyself can be a pretty straightforward endeavor.

Here, in fact, I’ve narrowed this effort down to the five main tech-investing “types” or personalities. I’ve related them to my Five Tech-Wealth Rules. And once you’ve identified your type, I’ve also showed you how to avoid the pitfalls that are inherent with your particular investing personality.

When we’re done here, you’ll “know thyself.” And you’ll be ready to benefit.

Tech Investor Personality No. 1: The Race Car Driver

The Race Car Driver is someone who wants to profit from companies with above-average growth in sales, earnings and cash flow. For this growth-investor type, those three financial categories are much more important than the stock’s sticker price.

If you’re a Race-Car-Driver investor, you’re more than willing to pay a premium for growth as measured by key metrics. For instance, you probably won’t mind paying 40 times forward earnings when the overall market trades at just 15 times next year’s profits.

For this type of growth investor, paying five times book value (P/BV) or sales (P/S) is just fine – even though the general “rule of thumb” is a maximum of two times. The reason: They’re looking for firms that grow their earnings by 25% to 40% a year. With growth like that, a company’s stock could double in as little as 18 months.

Amazon.com Inc. (NasdaqGS: AMZN) is a classic growth stock. Trading at $375, the stock has gained 435% over the past five years. The company has a 20% increase in annual sales, but miniscule operating margins of 1%, which is why the stock is trading at 89 times forward earnings.

The Know-Thyself Risk: With a stock like this, the danger is quite clear: If they miss the expected earnings target by as little as a penny, the share price will get a “haircut.”

A way to manage that risk is follow my Tech Wealth Rule No. 4: Focus on Growth. When I told you about my rules last year, I said that focusing on growth means you have to sleuth out firms that have strong fundamentals.

Good candidates are companies that have demonstrated consistent double-digit sales growth. That way, when the company’s breakthrough technology finally achieves its potential, all that cash flow will fall to the bottom line.

Tech Investor Personality No. 2: The Banker

The Banker values income and is more concerned about the size and quality of a company’s dividend than on the firm’s earnings growth.

While this may seem contradictory for a “tech investor,” it’s become surprisingly prevalent since the bear-market bottom of early 2009. There’s a growing sense among investors that – in a low-interest-rate environment like this one – getting a steady dividend stream is a great way to bring in extra cash and increase the stock’s overall return.

And consider this: Over the last several years, the tech sector has steadily courted this type of investor by either introducing a dividend or by boosting the “payout ratio” on an existing dividend program.

A big reason for this is that tech firms can generate huge amounts of cash. U.S. firms today hold a combined $1.5 trillion in cash and equivalents, and tech accounts for a whopping 40% of the total.

Microsoft Inc. (NasdaqGS: MSFT) is a classic income-oriented tech stock. With a current yield of 3%, the stock has had four dividend increases in five years. Over the period, the stock itself had gains of 121% but when you add in the value of the dividends that rises to at least 143%.

The Know-Thyself Risk: If you’re a Banker, the biggest concern is that, if you tie up most of your capital in these “Steady Eddie” stocks, your returns may fall short of what you need to save to live on.

A way to manage that risk is to take a balanced approach to building a tech portfolio, getting an overall blend of both growth and income.

For this, you can use my Tech Wealth Rule No. 5: Target Stocks That Can Double Your Money. These are companies that are growing earnings at high rates, but that also have the ability to sustain their operations and reward investors with cash.

If you value both growth and income, keep an eye out for stocks like Honeywell International Inc. (NYSE: HON), which we talked about on March 14. This is a stock that offers double-digit earnings growth along with a 1.9% yield and a history of dividend increases.

Tech Investor Personality No. 3: The Power Player

If you’re a Power Player, you’re a “momentum” investor who’s looking for share-price action. You tend to focus on stocks that are on the move, often without regard to any underlying fundamentals favoring the company or its industry.

At its most basic, this approach appeals to investors who eschew “brand loyalty.” All that matters is that you’re invested in a stock, and that stock is headed up. You’re looking for “fast-movers” capable of providing a quick profit.

Power Players are far more likely to go long on the way up but then turn right around and short the stock once it tops out.

Small-cap Plug Power Inc. (NasdaqCM: PLUG) exemplifies “momentum investing.” The company is losing money hand over fist, has negative cash flow and trades at 130 times next year’s earnings. But the stock zoomed from $3.63 on Feb. 21 all the way to $11.71 on March 10 – and then collapsed when the “momentum” faltered.

The Know-Thyself Risk: To be a successful Power Player, you must be able to quickly and unemotionally pull the trigger quickly at the first hint of trouble. But you have to take care that you don’t engage in so much trading that your gains are eaten up by transaction costs.

This is where Tech Wealth Rule No. 3: Ride the Unstoppable Trends comes into play. To make these plays profitable over the long haul, you must differentiate between a stock that’s benefitting from a temporary surge and one that’s getting a run thanks to meaningful catalysts like a “disruptive” new product.

Tech Investing Personality No. 4: The Opportunist

The Opportunist is a personality type I know well. During the summer, I sail two times a month with a group of tech-investing friends of mine.

One of them is Bob, a retired engineer. It’s not unusual in a single two-hour sail for us to discuss turnaround stocks, initial public offerings (IPOs), dividend plays, and small-cap biotech firms that may report progress on blockbuster drugs.

So, he’s always on the lookout for a great opportunity whether that’s growth, income, momentum, IPOs, workouts, or spinoffs – as long as there is a strong investment case.

In the past we’ve actually discussed several opportunistic plays here at Strategic Tech Investor. Most of them fall in the category of “special-situation” plays, including corporate turnarounds.

Adept Technology Inc. (NasdaqCM: ADEP) is an opportunistic play on a small-cap turnaround in the robotics industry. Since I first told you about this stock on March 19, 2013, Adept is up 487%.

The Know-Thyself Risk: Opportunists must remember that there are many “moving parts” to investments like this. So if you don’t have the time and discipline to review your holdings several times a day – as Bob does – you run a very good risk of being blind-sided.

If you want to be an all-around player, you can mitigate the risk by following my Tech Wealth Rule No. 1: Great Companies Have Great Operations. By focusing on companies that have proven leadership they are more likely to be innovative and nimble and thus able to execute their vision to deliver wealth-building opportunities.

Tech Investing Personality No. 5: Good Time Charlie

This type of investor likes to be “in the know” at all times and jump on the latest trends. Good Time Charlies can chew up a lot of time and energy trying to stay abreast of investment news from newspapers, blogs, television and the Internet.

These are people who take a lot of pride in picking the right stock at the right time. But just like teens who swoon over the flavor-of-the-month pop stars, Good Time Charlies focus heavily on the stock du jour.

The Know-Thyself Risk: The downside of being a Good Time Charlie is when a stock or the whole market heads down, they take it personally – or blame the tipster. They often sell too early because they can’t stomach the dips, or the volatility.

Because they really only love big rallies, these investors tend to “gut out” the sort of choppy, sideways markets we’ve experienced recently. Thus, they often miss great buying opportunities.

Take the case of Apple Inc. (NasdaqGS: AAPL). As long as the company seemed invincible, it was an easy stock to love. But the minute it hit a bumpy patch in mid-2012, investors dumped it en masse.

Apple has a PEG (Price/Earnings to Growth Rate) Ratio of 0.59, or 59% of its “fair value.” That means Apple remains a screaming buy at $536 a share. So, where are the Good Time Charlies now?

This is where Tech Wealth Rule No. 2: Separate the Signal From the Noise comes in handy. Rather than be overwhelmed by the constant buzz, Good Time Charlies should ignore the hype and discern whether the touted stock has the rock-solid fundamentals needed to generate strong returns.

Bringing It All Together

Let me be clear on one thing. There is no right or wrong approach here. Any investment strategy can work well – and pay off big – as long as you are consistent in its application … and are honest with yourself.

By that, I mean you have to be honest with yourself about your true goals and motivations. And it’s even more important to be honest with yourself about your weaknesses or flaws. It’s there that “knowing thyself” can pay off the most.

So pick an approach that suits your sentiment, and run with it.

Do that and you’ll remember this as the day that you really came to terms with yourself – and put yourself on a pathway to wealth.

See you later this week.

[Editors Note: What type of Tech Personality are you? Do you fall into any of the categories that Michael has listed here today? Or are you a different personality entirely. Let us know below.]

19 Responses to Know Thyself: Take My “Tech Investor Personality Test”

  1. Joan Nuttall says:

    I am not really a stock investor. I do not trust the stock market. I do not have a brokerage account. I am totally illiterate where the stock market is concerned. I would like to try my hand at investing, but need a lot of education to do so.

  2. Richard Waldren says:

    Michael, I am a combination of 3, 4, 5. I can’t stand high PE’s. I would be afraid I would be holding the bag when everybody jumps ship. As always, thank you for your recommendations.

  3. Ron West says:

    Yea! I know at least one of each of these types and over the years have been at least three of them. But that’s a point I think you miss. Even though My portfolio has continued to be based in the tech sector, as I have moved from a highly productive 40 something through my 50’s and 60’s and now in my 70’s my approach has changed regularly. While my risk acceptance level has not changed that much, my understanding of WHAT I am risking has certainly changed and this has driven my investing strategy. I guess at this point I lay some place between the Banker and the Race Car Driver (which I was for many year!) and it seems to be working well. Not to change over time is to die! Both sociologically and financially. Great article. . .

  4. John W. Bumpus says:

    I think I would fit a little more on the side of the banker personality but I am more aggressive than the banker. I don’t play it as close as I might.

    I am for learning. If you have other tips of this nature please send them.
    I do not know how to place an order with the 25 percent loss stop.

    Thanks JW Bumpus

  5. Jay J says:

    How about the trusting soul strategy. This person listens to his financial adviser and follows along without much thought. He rarely reviews his holdings. Never questions decisions made on his behave. This person may also follow after financial subscription publications and invest as directed without personal research. The trusting soul loves a good story and graphs and big numbers.

    The strength of this strategy depends on the quality of advisers or publications that they use. The down fall is that there are a lot of people waiting to take the lamb to the slaughter. Tech wealth rule number 6 – nothing should replace your own investigation and research. This means in who you trust as well as what investments you make. Jay

  6. Bob says:

    I am a combination of 4 and 5. Somewhat conservative and maybe overly cautious. Look for good fundamental and technical factors.

  7. ed says:

    I am 79-trqde options, and most of your risky reccos.. How else can one become a millionaire after 78 if he doesn’t take these kinds of risks? Any answer?

  8. Charlie Garzoli says:

    I’m in the Banker category, as I prefer World-Dominating stocks that increase their dividend annually and have huge cash flow, buyback shares, and have little or no debt.

  9. Nancy Andersen says:

    I am most like that ‘Trusting Soul’. I have never placed an order on my own and am reluctant to try. I am a widow who trusted my husband to make all the financial investing decisions (and he did very well).

    Is there an average minimum order or a way to figure a ballpark estimate, including fees? I have some available cash, but not in the thousands to spend.

    • George says:

      Nancy, take a look at the Fidelity website. You an access the learning material without going thru the User/Password gates. I’m self taught and now know how. It’s done in a bull market. Now it’s back to school to learn about bear markets. Best of luck!

  10. Hugo says:

    It takes, the way I see it, a blend of knowing yourself, overall knowledge of the market, investing capital availability that will not effect your living standars in case you take a dip. Obviously, all of the above is common sense, but you have to be ready, personally, to take risks and that requires will power. Like when you buy your first house for your family when you are younger and in your prime. But if you are illiterate about the market and untrustful of recommendations, and also retired, what personality will apply ?

    By the way, what do you think about investing in options, for example, gasoline or other commodities that are seasonal?

    Thanks for your newsletter

  11. J David Benson says:

    I change constantly I have different objectives within different accounts but sort of always on edge. I definitely trust my own thinking and will always review any recommendation with results that I sometimes turn down an opportunity that was an awesome opportunity. But sometimes I invest in something that was horrible absolutely the wrong thing to invest in. But I also use stops and don’t stay long in things that are going against me. I’m always communicating with others to see what they are up to and reading stock market books and websites that try to educate one.

  12. Anne says:

    I’m probably more of a Banker type investor, but the ones who look for growth and income. That said, I’m also a bit of an Opportunist, and wish I had more time to follow things more closely. And I’ve a little of the Race Car investor in me, as well. With both of the latter I’ve set aside a definite (and quite small) amount to risk, and do not exceed that amount. If there are successes, I reinvest the net (after losses and transaction fees) in more of the latter two types of investing. Discipline is the key here! As in all investing.

    My answer to Bob Regan: Yes, of course, they all will go up! (You gave me a chuckle, at least…)

  13. Alfred Kreps says:

    In my 80’s, I am still an active in our family community bank. I have a portfolio of five seasoned mutual funds and 24 other stocks. I have some big winners and a few in the red now. I do not do much buying or selling. All my stocks are DRIPs. I do not need to use any of my portfolio or my cash in bank. My goal is to allow the portfolio to grow for use of my granddaughters education. What am I doing wrong?

  14. Arthur Mierisch says:

    Two questions?
    1. Is Cheneire still a good by?
    2. You like bitcoin but the WSJ doesn’t. How come?
    Thanks

  15. Phil Mathews says:

    Former Race Car Driver here, lucky enough to ride INTC, MSFT and other big-name tech stocks of the Clinton era 1990’s to big gains–then all my ‘Ferraris’ hit the wall in 2000-01.

    Still a bodacious Racer in 2003, I ‘discovered’ high dividend Sub-prime Mortgage Companies-until the sub-prime sector’s head-on crash with Wall Street short sellers around the middle of that decade.

    Being a ‘Main Streeter and a Racer is a not a great combination.

    I had no clue that the SEC would override its own rules on the timely clearing of short sales and the illegality of massive numbers of ‘naked shorts’ (i.e.: shorts not covered by borrowing the stock Instead they created the Regulation SHO list of stocks having the largest short positions, the final and fatal collision for the sub-primes.

    After that experience, not having timely information on my side (e.g.: in order to act wisely before the SEC announces a Rule Change contrary to Prior Commentary on that Rule Change) or the time to reallytotally study the market, and given the ethics of Wall Street, I totally withdrew from the market until now. My approach would be much more conservative today.

    I admire Mr. Kreps’ wiser and sounder approach as outlined above, for one. And of course I em subscribed here to be informed by an Expert, Mr Robinson, in the workings of the market from his point of view. Bravo, Mr. Robinson!

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