Monday, July 12, 1999
The Inner Game of Investing
Is Donald Trump somewhat indifferent to whether he loses everything in Trump Hotels & Casino Resorts Inc. (NYSE: DJT) because he inherited his money? Could Alan Abelson be so skeptical because he was laughed at in first grade? These are a few of the questions that ran through my head as I read Derrick Niederman's new book on the psychology of investing entitled, The Inner Game of Investing: Access the Power of Your Investment Personality.
In his new book, Mr. Niederman, a contributing editor to Worth magazine and a former national squash champion, articulates the thesis that one of the general problems with books on investing is their insistence on providing a one-strategy-fits-all technique approach. The world of investment books is littered with examples of an author basically arguing, "This strategy works for me -- so it ought to work for everyone who is reading this book." However, according to Niederman, as investing animals each of us is ultimately controlled by our individual psychological make-ups, and a winning strategy that works for one type of person may very likely be completely unhelpful for somebody of a different psychological profile.
The "Inner Game" in the title thus refers not to any "secrets of Wall Street professionals" but the game inside one's own mind. As Niederman puts it, "If you could only reassemble the strengths of the various investment types, you'd be unstoppable. But guess what? You can't do it. It's impossible to be everything to everybody. What is possible is to better understand how various personality quirks and predispositions interact with that maelstrom of activity known as the stock market. After all, there are only a finite number of mistakes that we can make: We can sell too soon, we can buy too late, we can hold on too long, and perhaps we can commit a few other sins along the way. But for any one investor, some mistakes are far more likely than others." Recognizing and eliminating those mistakes is the major theme of the book.
Niederman divides the "investing personalities" into seven types: the Bargain Hunter, the Visionary, the Contrarian, the Sentimentalist, the Skeptic, the Trader, and the Adventurist. For each of these personalities the book offers five questions to help the reader decide whether he or she might be psychologically predisposed to succeeding with one strategy rather than another.
Many of the questions are transparent -- for instance under "Are you a Trader?" Niederman offers: "1) How many times per year do you not know the closing market numbers by the time you have dinner? 2) Do you ever 'fight the tape'?" You can probably answer off the top of your head where the answers to those put you along the trader/non-trader continuum. Other questions are more elusive, and therefore a bit more interesting: "Do you have children?"; "Did you have a contented childhood?"; "Are you absentminded?" These are posed to help you figure out whether you might be most successful by investing as a Visionary. To help you determine whether you are a Skeptic, the book asks, "Were you laughed at in first grade when you made a mistake in front of the class?" Some Adventurists perhaps share the trait of having inherited their money, rather than having earned it.
The Inner Game of Investing relies primarily on anecdotal evidence to support what types of investments would make the most sense for Niederman's categorizations of different psychological profiles. To that extent, numbers freaks are going to be somewhat disappointed in what the book can offer. Further, of necessity, the book does not claim that every (or any) individual can be perfectly categorized into one profile to the exclusion of others. If some readers might be dissatisfied with the level of detail included in the book on that level, it has to be recognized that a somewhat short and easily readable book on investing isn't likely to be able to give every reader a quick, easy, and definitive psychological self-evaluation. If it were that easy, there would be a lot of $200 an hour psychiatrists being put out of work awfully quickly.
Even if the classifications are not completely satisfactory, they do add some context to many of the ongoing discussions that visibly take place on the local message boards. Take the typical discussions contained in the Amazon.com message board. Many of those that invested in Amazon.com (NYSE: AMZN) a couple of years ago might be classified as Visionaries. (Here, I adopt Mr. Niederman's vocabulary without passing judgment on whether the term -- with any positive connotations it might carry -- is the appropriate one.) Visionary investors were perhaps foreseeing a day when Internet commerce would be a substantially more powerful business than others dreamt. Other investors might well also have purchased Amazon as Traders, or even as Contrarians. For any early purchasers, regardless of their reasons for investing, AMZN turned out to be a nice acquisition.
Fast forward a couple of years and Amazon.com presents itself as a different animal, both as a company generally and as a stock that has multiplied in value so many times. Amazon.com may be something that no longer appeals to the typical Trader, but appeals as much as ever to a Visionary. The dialogue on the Amazon.com board -- which often resembles the type of violent storm that might occur if a high and low pressure system were to meet somewhere above an exposed section of the American Plains states and just refuse to move for a couple of years -- hasn't necessarily been about the company in a long while. At a certain level, the subtext is simply and repeatedly one side asking "Why can't you be more of a Visionary?" with others answering, "Why should I be? I'm a Trader, and quite successful at it."
Niederman doesn't pick sides in this fight, though he barely represses his views about where his true thoughts lie about Traders. He writes, "I'm going to keep my promise of withholding judgment about what is right and what is wrong, other than to say that it is quite arguably wrong to tell someone to make only long-term investments when their psychological makeup doesn't permit it. Would you force your ADD grandchild to sit through La Traviata? Our job as investors is to do the best we can with what we've got."
A note from the author (imaginatively entitled, "A Note from the Author") is posted on our boards summing up Mr. Niederman's intent in the book. It states, "If you think that my thesis is kind of obvious, let me say that I agree: Knowing that personalities matter is not enough. The crucial next step is to learn the patterns of our mistakes and stop making them!" Just so.
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