Growth, Value or Momentum: Match Your Investing System to Your Personality
By
Michael Cintolo, Vice President of Investments, Editor of
Cabot Market Letter and
Cabot Top Ten ReportWhat's the best system to make money in stocks?
There are no shortages of options to "attack" the market.
Value investing was (and is) wildly popular thanks to the media's obsession with Warren Buffett. Some investors favor mutual funds and asset allocation. Day and swing traders, because of the advent of the Internet, are popular.
Growth investors might be in the
momentum camp, the GARP camp (growth at a reasonable price) or the buy-and-hold-forever camp. And this is just the tip of the iceberg!
Then there are the tactics for portfolio management. Should I buy more on the way down? When should I sell for a loss? For a profit? How many stocks should I own? And, oh yeah, how do I decide which stocks to buy!?
Over the years, I’ve executed hundreds of stock trades with my own money, testing various theories and styles, and making plenty of mistakes along the way.
I realized there was no perfect method of investing in stocks. What really matters is matching the system's pros and cons with your own personality. Read that again. It sounds a bit "out there," but I am 100% sure this is true.
I base this not only on my own investing experiences, but also on meeting and corresponding with hundreds of other investors. I've seen solid investors with good discipline and great "market minds" lose boatloads of money because they tried to force themselves into a system they weren't comfortable with—either taking on too much risk, or too little, or owning too few stocks or too many, etc.
Let me give you an example. Say a rather conservative guy was trying an aggressive growth strategy. Well, as long as his stocks were going up, no problem. But the market isn't a one-way street, and so when the inevitable correction came around, this investor would be horrified at the quick drawdown (drop from an equity peak) he suffered. And then he'd throw all his rules out the window and sell stocks—usually near a market low.
You might read this and say, "It's obvious why this guy didn't do well. He didn't follow his discipline; he panicked at the bottom!" And that's true. But the fact is you have to have a discipline you truly believe in—one that you can follow without worrying about your financial future when the market gets rough. If you don't believe in the system, you'll never follow your rules when the stress level is high.
Said another way, the more comfortable you feel during periods of adversity, the better the decisions you will make. And that goes hand in hand with better portfolio performance.
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