This is the fifth in a six-part series designed to help you
understand what type of investor you are.
This is the fifth in a six-part series designed to help you understand what type of investor you are.
Every investor wants to be “in the know,” especially Bandwagon Billy. He is so reliant on the opinions of others that his participation in the market is determined by what they say and think.
Bandwagon Billy is the type of investor that is always in search of the “prevailing opinion.” He follows what is expressed in the newspapers, magazines, on the radio and television and the conversations he has with friends and acquaintances. Unfortunately, forecasts are always a hit-or-miss affair. That’s why some investors, called contrarians, actually take the opposite action of what everyone else is being “told” to do.
The old adage says the best way to make money in the market is to buy low and sell high. Since Billys buys according to the prevailing opinion, no matter how much the prices have risen, they normally end up buying high and selling low.
Bandwagon Bills can protect themselves by taking the time and effort to do some careful research. The bottom line: if you can’t do the research, don’t invest. Billys need to take a step back from their emotions and relinquish some control over their sense of timing. One way to do this is through a Good ‘Til Canceled (GTC) order. GTCs are limit orders to buy and sell in which you’re able to specify a price ahead of time.
For example, if you’re interested in buying XYZ, which is currently at the market price of $40, and use a GTC order to purchase XYZ at $36. That order says that if XYZ falls to or below $36 over the period of time you’ve specified, you’re committed to buying it.
On the other end of the spectrum is Analytical Al. Al won’t make a move unless he has studied a company fully and thoroughly.
Al was a pretty successful guy, partly due to his intuitive understanding of numbers. That’s why many accountants and engineers can do extremely well in the market. The reason why some Analytical Als can fail, is they can start becoming too much of a Trader Ted without the trading experience. If Als over-accelerate the accumulation of their assets and trade too aggressively, they could end up losing a lot of money.
One area of potential is convertible bonds. These are corporate bonds that are able to be converted into shares of the issuing corporation when they reach a set price. Most of the time, these bonds will be fairly priced, but with research you may be able to find one where the market price doesn’t reflect its intrinsic value. The purchase of such a bond should result in a profit when the market realizes what it’s worth.
Closed-end mutual funds can also exhibit such discrepancies. A divergence between the actual value and the market value will create the opportunity for profit. Als can take advantage of their talents and maximize their gains by focusing on those areas of the market where possible divergences can develop.
You can contact Eric at: www.WealthCreator.com
or 297-9800.
