What colour are you?

I did a personality test once. There are as many shades of personality as there are people of course, and to make any sense of something so complex the analysis had to generalise, which meant pigeonholing us all into categories.

This stockbroker’s personality test broke us all down into four basic types based on four basic patterns of behaviour. They labelled them:

1. Excellence,
2. Analysis,
3. Harmony, and
4. Action.

They branded me as “High Action”, but they were looking for someone more “High Teamwork”. It’s the stockbrokers Macquarie rejects that makes Macquarie the best.

Another personality generalisation is used in the famously popular book Surrounded by Idiots by Thomas Erikson. The book interestingly classifies personalities into colours. Red, Yellow, Blue, and Green. Each colour has its own traits and once you have identified your colour, the book teaches you how to interact with the other colours. I’m a red, apparently, I’m “fast paced, a risk taker, purposeful, driven, strong-willed, high energy, competitive and rational”. I am also “Impatient, intolerant and overbearing”. You get the idea. I find all the other colours so slow!

And so, we come to investors. After 41 years in the stock market, I can tell you, there are different “colours” of investors as well. I too have generalised and have identified five. Let’s take the lead from Thomas Erikson and Surrounded by Idiots and call them, in order of risk tolerance, White, Green, Blue, Yellow and Red.

White 

If Black is the absence of any colours, then White is a mixture of all the other colours. Whites represent the huge tail of Australian investors that sit in Industry funds and large retail Super funds and pay their investments almost no attention at all. Yet. Whites are the spawning ground for all the other colours. At some point they may migrate to something more colourful, but for the moment, investment is little more than something they watch someone else do through their Industry or Super Fund’s website.

Green – Market Timer 

This is least volatile, safest approach to more active investment. This is also what a lot of younger investors are now actively trying to do. This is what I will do when I retire. Greens use ETFs to time the market. Contrary to the self-serving industry mantra that you can’t time the market, you can, and we have proved it. At the time of writing, the market timing strategy fund we have run in the newsletter since 2018 has returned +26.93% in the last 12 months compared to the ASX 300 Accumulation index’s +3.82%. 

This year we have timed the AI boom using the FANG+ ETF, sat in cash for 120 days without a break whilst the market went down, and more recently have caught the bottom of the market buying after the recent FOMC Meeting. This is a low-activity, low cost, approach that involves making a few decisions using mostly passively managed market-focused ETFs. It is an approach that is logical, because it is sometimes in cash, less risky than the average “always long” equity fund. 

The goal for the market timing investor is to catch the bull markets but avoid the corrections by being just a little bit more vigilant. Amazingly, even the White zone investors, can do this without any change in structure at all. All they must do is occasionally change their asset allocation using their big fund website. We time the market using exchange-traded funds, all of which are traded on the ASX. They can be used to give us an exposure to all sorts of international as well as the domestic sectors and markets. We only use passively managed ETFs.

Blue - Income Investor 

Blues are the biggest group of active investors. Blues are analytical, sensible, are often retirees, and many, or is that most, or all, are focused on income. Blue investors have generally already built enough capital to service their income requirements and the job is to manage that to provide a living from the income and franking. They commonly invest in an obvious group of around 20 mostly large, low volatility, individual shares and pick those stocks for their income, franking and their sleep-at-night character. These are “quality” stocks that are generally large, reliable, and will be around in 10 years.

The Blues don’t ever want to be disturbed by the market, or their stocks. These are the set-and-forget investors (yes, there’s nothing wrong with that), and success for them is to finish the year with the same amount of capital they started with having lived in the meantime. A good year for a Blue is finishing the year with a bigger nest egg than they started with. Blues are experienced, they don’t spend more in a good year. They know there are bad years. They’ve been around.

Yellow – Growth Investor 

Yellows are the nest egg “Growers”. The “Accumulators” as the tax legislation calls them. Yellows are usually pre-retirement (although a lot of retirees do this as well), are still working and are looking to grow the nest egg. Because they generally have a job, and don’t need income, the Yellows can afford to take a bit more risk. 

Yellows want to "set-and-forget" and be long term but, unlike many Blues, are prepared to sell when they make mistakes. Their target is capital growth not income and they do that not by trading, but by focusing on stocks that have a high return on equity and low payout ratios. That requires a bit more reading and research and a lot more vigilance. 

To match their higher risk appetite, they are likely to have an expanded skill set that stretches beyond fundamental analysis to the understanding of technical analysis including charts, trends, signals, support and resistance, and other signposts that allow them to exercise their rare ability to sell when they get it wrong. Success for a Yellow is to grow the nest egg by 10% per annum. Or more. Income doesn’t matter.

Red – Traders 

Traders include stock market-interested people from every stage of life and they come from all the other colours. Contrary to popular belief (the popular belief of the Whites), this is the smallest not the largest group of active investors. Any investor can trade. Many Blue investors ‘trade on the side”, allocating X% to trading while keeping the bulk of their money (the nest egg) invested through a lower risk, less active, more formulated, and rigorous process. 

Reds come in all shapes and sizes and include the whole spectrum of competencies, from the loud-mouthed gambling idiot to the highly skilled, disciplined, and experienced professional traders. Unfortunately, the loud-mouthed gambling idiot is the most assumed persona of the trader when it is, the most insignificant group of investors in the whole market, possessing, as they do, the shortest half-life. Most investors start out as traders and mature into something less stressful. Experienced traders probably know more about the stock market than any other group. And are the least emotional. Spock is a fabulous trader. Logical. Unemotional. Knowledgeable. Decisive.

So, the question you must ask yourself now is what sort of investor do I want to be? Which colour are you? And in what percentage?

Work that out and your antennae will soon start to pick up on the right stocks, the right skill set and the sooner you start, the sooner you will achieve a clarity of purpose.