8 Questions That Define Your Investing Style

We're celebrating Financial Literacy Month in numeric style. Follow our crash course on maximizing your portfolio and finances with The 10 Essential Money Lessons.

The path to financial literacy follows a logical sequence from start to success. So far in this series you've:

Ready to invest? Set! And ... wait! One more thing -- well, eight more things, actually.

Your moment of investing Zen
How well do you know yourself? Do you know your tolerance for risk and loss? Have you pinpointed your investing time horizon? To what degree are you interested in digging into stock research? In other words, what color is your investing parachute?

As Warren Buffett says, "Success in investing doesn't correlate with I.Q. ... what you need is the temperament to control the urges that get other people into trouble in investing." You've gotten this far, so it would be a shame to get sidetracked by emotional triggers that lead to bad investment decisions.

How are you wired?
Before you deploy your money in the market, take this quiz to identify your natural inclinations (both good and bad) so you can find the methods, philosophies, and strategies that best match the way your brain is wired.

1. You're at the store and on the shelf is an array of options for the product you need. Which are you most likely to toss into your shopping cart?

A. The brand you've purchased in the past, even though it lacks the bells and whistles of some of the others.
B. A pricier brand you've always wanted to try because it's on sale for 20% off today.
C. A brand-new product that promises revolutionary results.
D. A reasonably priced version that has not been FDA approved, but has gotten favorable reviews from its customers.

2. You log onto your brokerage account. Which scenario are you happiest to see?

A. The market's up a whopping 10%, but your stock gained just 1% during the run-up.
B. One of the companies you own missed hitting its earnings target and is down 30% as a result, giving you the opportunity to buy more shares at fire-sale prices.
C. Over the past six months a stock in your portfolio has traded anywhere from $10 to $80. It's at the low end of that range right now, but you think it has the potential to double or even quadruple over time.
D. One of your stocks is up 15%, but there's no obvious reason why, so you'll have to do more research to find out.

3. Which activity are you most likely to choose at the theme park?

A. A spin on the merry-go-round with your kids.
B. The newly revamped 3-D laser Zombie show.
C. The Nitro at Six Flags.
D. Forget the rides and head to the "Tastes of the World" food court.

4. How much information do you need to comfortably make buy, sell, or hold decisions?

A. You like to get regular company updates that are widely followed and analyzed by Wall Street, the media, and individual investors.
B. You prefer to check in on the business -- or its customers -- firsthand either in person or via online forums.
C. You regularly consult SEC filings, trade journals, and industry forums and do all your own analysis.
D. You're content with fairly regular coverage of the sector in which the company operates, even if news about your particular company can be spotty.

5. One of your companies is in the headlines today. Which event would not cause you to lose sleep tonight?

A. The company says it may have to temporarily suspend paying its dividend.
B. The launch of the company's next product has been delayed for at least several months.
C. The Board of Directors is making noises about ousting the CEO in order to install an industry veteran.
D. The currency of the country in which your company operates has taken a haircut.

6. If this were an "I'm a Mac/I'm a PC" ad, which company would you be?

A. Berkshire Hathaway (NYSE: BRK-A  ) (NYSE: BRK-B  )
B. Buffalo Wild Wings (Nasdaq: BWLD  )
C. Google (Nasdaq: GOOG  )
D. America Movil (NYSE: AMX  )

7. The business trajectory that most excites you is ...

A. A stable, mature company with some room to grow via cost-cutting efforts, strategic acquisitions, and/or partnerships.
B. A newcomer that has not yet made a name for itself (and may not for many years) and has no heady expectations priced into the stock.
C. An innovative -- and often volatile -- company that challenges the status quo and has the potential to dominate (or create) a business niche.
D. A company that is ideally positioned to capitalize on fast-growing economies overseas.

8. What kind of volatility are you willing to endure on the road to wealth?

A. I'm not looking for massive growth -- I'm willing to settle for a couple of years of so-so returns just so I don't lose a lot of money.
B. I'm willing to endure a few white-knuckle periods until my investment hits the bull's-eye.
C. I'll hold on for dear life -- even while everyone else is bailing -- if I truly believe that the long-term payoff will be big.
D. I can stomach volatility that is beyond the company management's control (e.g. currency fluctuations, political messes) if it means being in the right place at the right time.

The Key: What's your investing temperament?
Let's see how you're wired.

Mostly As:
You've worked hard for your money and even if it means passing up headier potential returns, you're most comfortable limiting your exposure to risk. Patience is your investing virtue. Like the great Warren Buffett, you have the temperament to wait for a quality company to go on sale.

Your stocks probably won't wow anyone at a cocktail party -- after all, big-name, been-around-forever companies don't typically make for riveting chitchat. But when the confetti settles, it's your time to shine. If your portfolio were a party guest, it'd be the designated driver: sober but reliable. It gets you where you need to go with no hairpin turns or squealing wheels.

Look for quality companies that have seen their share prices temporarily discounted. You'd also do well to seek steady growth with investments that literally pay investors back -- dividend stocks. (These are the investing strategies we practice in our Inside Value and Income Investor services.)

Mostly Bs:
Sound business practices (e.g., strong balance sheets, good management) are as important to you as any investor. But you're willing to look for these things where few others dare to tread -- in small-cap territory.

While the rest of the world is fixating on the name-brand players, you're prowling for their smaller, nimbler, lesser-known competition. At The Motley Fool, we call such companies Hidden Gems.

Because of their size, these companies fly well under Wall Street's radar. The flip side is, of course, that they can often wildly fluctuate in a single trading day. But if "Bs" dominated your quiz results, then you have the stomach to tolerate the volatility, particularly in the pursuit of bigger returns.

You could build a market-beating portfolio solely comprised of Hidden Gems (or any other type of investment, in fact). But it's probably more reasonable to devote just a portion of your investible assets to the best-of-small breed of stocks -- anywhere from 10% to 40% of a portfolio depending on your comfort level.

Mostly Cs:
Innovation gets your heart racing. When high-def, Bluetooth-enabled, surround-sound rocket boots hit stores, you'll probably be the first person on your block to own a pair.

In investment terms, you seek companies that challenge the status quo -- those that take on an established business, reinvent it, and eventually usurp the original. Even better are those that create an entirely new market for something everyone didn't even realize we couldn't live without.

At the Fool we call these companies Rule Breakers (apt, eh?). And in every way, these businesses defy the rules. Traditional valuation metrics like P/E ratios and discounted cash-flow calculations don't fly in the land of Rule Breakers. The numbers often look wacky because the Street simply doesn't have the tools to accurately assess these companies' merits, so as a shareholder you need to stay alert and be psychologically nimble enough to reevaluate your investment thesis. Flexibility is a must.

Also be aware of the rule of Daedalus: You can't keep flying higher and higher without eventually getting burned. This may be the most exciting kind of investing there is. But you must recognize the big-risk/big-reward connection. Your mistakes will cost you. But it's a lot less painful if you spread the risk around with other asset classes.

Mostly Ds:
You are a worldly Fool. In the pursuit of investment opportunities, you're not afraid to tread into foreign territory -- literally. You recognize that the rate of growth of our economy versus others has changed. The U.S. will still grow, but there are countries where the growth opportunities are astronomical.

"International" is not an investing strategy per se. In our Global Gains newsletter service we seek investment opportunities overseas no matter what label they carry -- small cap, value, Rule Breaker, etc.

If you pine for foreign flavor in your portfolio get comfy with a little less clarity from the companies in this universe. Your comfort level with different accounting methods, shareholder laws, currency risks, and even "political risk" will determine how much of your portfolio to devote to international fare.

A combination of As, Bs, Cs, and Ds:
No, you're not fickle. You simply seek a variety of opportunities to make your money grow. In your heart you know that investing in the stock market is the one true way to build inflation-beating wealth over the long term. But sometimes your doubts overcome your determination to stay the course. You can be gun-shy, perhaps because of a few investing missteps in the past (burned by a hot tip, perhaps?). Or maybe the stock market's recent contortions have left you questioning how much risk you really can stomach.

Your answers reveal a temperament that recognizes the true price of opportunity (taking on some amount of risk) and the real cost of waiting out the storm (missing the market's brief yet inevitable uptick). You've got a mind-set that's well-suited to allocating portions of your portfolio to the best investments from a variety of stock-picking approaches.

Establishing clear parameters -- an asset allocation model -- is the way to go. As to how much to put into which pot, the correct answer is the one that best lets you sleep at night and stick it out through thick and thin. Don't fight your natural tendencies ... instead play to your strengths and seek investments that sit well with you.

Finally, consider that the stock market's recent gyrations may be influencing your answers. That's understandable; even the best investors have been rattled, and may even be questioning their own core strategies. However, in volatility, there is opportunity. Not just in finding bargain stocks, but in taking the pulse of your own investing temperament in a real-world/real-money scenario.

Now that you've gotten a handle on your finances and have tuned into your inner investor, you're ready for our bonus tip. Tomorrow, we're going to give you the rundown about Foolishly investing in the stock market. Check back then!

In the mood for more financial know-how? Check out the rest of our 10 Essential Money Lessons.

Before joining The Motley Fool, Dayana Yochim's investing temperament could be confused for that of an 87-year-old widow. Today she is a mix of As, Bs, Cs, and Ds -- a true investing moderate. The Fool's disclosure policy is steady as she goes. Berkshire Hathaway is a Stock Advisor and Inside Value recommendation. Google is a Rule Breakers selection and America Movil is a Global Gains pick. Buffalo Wild Wings is a Motley Fool Hidden Gems recommendation. The Fool owns shares of Berkshire Hathaway and Buffalo Wild Wings.


Read/Post Comments (16) | Recommend This Article (92)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On April 29, 2009, at 6:07 PM, 102971 wrote:

    There is no such thing as a "type of investor". I am an investment advisor and I buy different stocks for different clients based, not only on their personal preferences but also (VERY IMPORTANT) according to their age. This is something that you fail to mention. I would not buy the same stock for a 25 year old with a solid income as I would for a retired 85 year old. The 25 year old can afford to wait through the volatilty of the market; the 85 year old can not. I also buy stocks for myself that I wouldn't buy for ANY client because I have a speculative vein which is higher than I could NOT reasonably or professionally expect my clients to have.

    YOU SIMPLY CANNOT IDENTIFY THE TYPICAL BUYER.

  • Report this Comment On April 29, 2009, at 6:52 PM, JibJabs wrote:

    Shameless promotional effort. Actually, shamelessness is not what bothers me. The article just wasn't useful. One thumb down.

  • Report this Comment On April 29, 2009, at 10:48 PM, FreeloaderZ wrote:

    superficial

    102971's comment was far more useful.

  • Report this Comment On April 30, 2009, at 9:37 AM, LRMarbitrage wrote:

    I don't know what you people are talking about. This was one of the better articles I have read on fool.com in a while. While I already know what kind of investor I am, it would be beneficial to those short-term speculators of the caps community to read this and truly understand it.

    To be an investor one needs to understand sound business principles. The author lays these out in an easy to understand fashion by relating it to peoples every day life.

    @102971---

    You make an excellent point about asset allocation based on if you plan to be a net seller or net buyer of stocks in the near future. However, if you read a little closer I think you will see that you agree with what they are saying, albeit it might be implied. Obviously she is not saying that investors who are planning on selling their investments due to retirement are going to wish for lower prices or more volatile markets. But most of us reading this( I am guessing) are going to be net buyers of stocks for 20+ years to come. Because of this we should embrace this volatility and declining price. This is because it is providing us with an opportunity to increase our ownership interest in a business at a more attractive price. I for one, am buying when there is blood in the streets.

    Also, if you read the piece carefully, you will notice she is talking about investors and not speculators. Because of this I feel that your argument on not being able to identify a typical buyer is not too accurate. In this piece she is clearly saying that this information is to be used by investors, or as I define them, those who engage in operations where safety of principal is guaranteed along with a satisfactory return. There is only a few ways to meet this definition. And none of them come in the form of trading. While what you do with your personal capital is up to your discretion I would urge you to not take this approach to your clients. I urge you to look for companies that are excellent businesses(HUGE MOATS and companies that mint cash), run by able and very competent management, that are selling a significant discount to their intrinsic business value. These three factors will give you a significant margin-of-safety when investing. And in return, you will receive outsize returns. Now obviously I am assuming a lot and you could be making bank for all of your clients employing certain trading strategies. However, it is my contention that this strategy is unsustainable. I do not think you, warren buffett, or anyone else for that matter can predict where the market is going to go in the next week, month or even year. Because of this I feel that if it essential to invest in a business that will be able to produce HUGE CASHFLOWS for some time out, and to pay a fair or bargain price. That way, your interests are aligned with the future of the business and you will get rich if the business continues to adequately deploy capital in a way that grows intrinsic value year in and year out. This is what investing is about. Again I want to stress that this is just what makes sense to me, and other strategies will also produce adequate returns so long as you look at them as investing endeavors.

    I do love one of your cap picks,Valero Energy (VLO). I urge you to change your holding period to a more longer term focused. I recently performed a discounted cash flow analysis on the company and was very pleased with what I uncovered. This company's stock price has been KILLED by the economic and financial crisis we are in the midst of. However, if you are confident, as I am that they will be on their feet again an interesting opportunity presents itself.

    For the DCF analysis I used a modest growth rate for the next ten years of 10pct. I think this is conservative for a company that has generated free cash flow growth of around 40pct over the last 5 years. Next I determined a conservative estimate for growth rate after the 10th year. Because I feel that I can not predict too future I opted to use 4pct (avg inflation rate over past few years). This is because I feel the company is past its growth stage and I tend to be on the conservative side when valuing companies. Next I chose an adequate discount rate. I chose 12 pct. This is because I feel that a reasonable and adequate discount rate should be AT LEAST equal to the long-term returns of the overall stock market, which is around 10pct. Since passive investors can make this by simply investing in an index fund, I boosted the rate by 2pct. This way I will feel as if my hard work is going to pay off. Before doing the calculation I wanted to find out what the book value per share was of VLO. After an examination of financial statements I came up with a rough estimate of $26/share. At today's market price (roughly 20.49 per share) you can simply buy the stock at a pretty significant discount to tangible book value. That is a good margin-of-safety. However, since I do not think that VLO is going to go out of business anytime soon I felt it important to discount in future earnings potential. After this evaluation (I can provide the math for those who are interested) I have determined the fair price of one share of VLO to be around $91.33. This provides a buyer today with a remarkable 78pct margin of safety. Indeed, Mr. Benjamin Graham is licking his lips from heaven.

    Because I am not fully confident in my ability to predict future earnings for most businesses, this HUGE margin-of-safety largely eliminates my downside. As Monish Pabrai would say, "heads I win, tails I don't loose much"(in this case heads I win, tails I don't lose anything).

    If you are not convinced of the benefical aspects of margin of safety one simply has to look at the market over the past ten years or so. To some peoples suprise (not mine or any intelligent investor), there is a clear statistical correlation the margin of safety and the annualized return of stocks. Meaning, if your investments over the last decade have had a higher margin of safety, then your returns have been significantly higher.

    So the point of that is that I think you should shift your focus on that stock from short term to long term. Email me at lmusser@slu.edu if you would like to discuss further.

    @JibJabs---

    I don't get your hatred of this article. At first I was assuming you were just another speculator, but after taking a look at your caps portfolio I was indeed very wrong. In particular I LOVE your picks PM, PG, KO, JNJ, MSFT, KHD, MKL. While it is clear that you know a lot about business investing (judging by your above picks) it is not safe to assume that most others know. This stuff is already ingrained in your mind and it is obviously of no help to you. But think of MOST OF AMERICA who tunes into CNBC daily. These people NEED to read articles like this or they will be doomed with their financial endeavors. But, regardless of that, your portfolio looks real solid and you should be set up nicely for the long term.

  • Report this Comment On December 08, 2009, at 1:26 PM, read6455 wrote:

    I enjoyed this article. It caused me to think about how and why I make the investment choices I do. I thought it was a great article.

    Thanks,

    Sandra Esche

    children's author

    handicapped and won't quit

  • Report this Comment On February 17, 2010, at 1:47 PM, beachmonkey wrote:

    @ 102971

    I think the main point is people reading this are not looking for an advisor to purchase stocks for them, rather they are looking to do the research and investing on their own. By realizing your own personality and habits, they (Fool staff) can recommend a specific service (i.e. Stock Advisor, Rule Breakers, Hidden Gems etc.) based solely on your own tolorance and personality. Perhaps you wouldnt choose the same stock for a 25 year old as you would for an 85 year old; but what if that 85 year old wanted to take a higher risk in a stock position that would not damage him financialy? If these are the types of investments he is looking for then he should be steered towards the proper product, which this article does a great job doing. I guess the more people use this service, the more potential clients are taken from your industry, and that I can see as an valid issue, but not so much the claims you state in your posting.

    Just my opinion,

    A monkey on the beach waiting for the fruity drink and umbrellas!

  • Report this Comment On April 14, 2010, at 2:23 AM, LostInJungle wrote:

    A bunch of hand waving, platitudes, generalizations, and sound bites.

    About as useful as a horoscope (what sign/investor are you?) and just as accurate.

  • Report this Comment On May 16, 2010, at 8:57 PM, EsotericTheorem wrote:

    I believe you were referring to Icarus, not Daedalus.

  • Report this Comment On July 22, 2010, at 3:41 PM, mathgeek2 wrote:

    I'm in the midst of doing some research before I get started with the stock part of my portfolio, and I think a questionnaire like this is a good service for someone in my position.

    LostInJungle -

    You've got to be kidding me.

    Let's say for simplicity you only invest in a single stock (a broad selloff like what we saw in 08 would be analogous). That stock delines in price by 25% next week. Your reaction would greatly depend on your temperament and when you'd need the money. A questionnaire like this is a good way for someone who's been burned in the past what sort of stock to look for.

  • Report this Comment On July 25, 2010, at 9:19 AM, NoviceProfessor wrote:

    I took the quiz and while it cannot ID a type of investor(if there is such a thing). It was fairly enlightening to a novice investor like myself. What I wonder is am I still considered a mixture of A,B,C,D's category even though I answered with every letter EXCEPT A??

  • Report this Comment On December 17, 2010, at 3:11 PM, britpick wrote:

    Very enjoyable article, and the resulrs are a bit like doing a personality test (eg Myers Briggs or DISC for those that are familiar). One is never totally one type, sure there are stonger traits that predominate, but the outcome is always something of a mixture. So I scored myself and rated 1.5A, 2B, 1.5C and 3D (OK, so I was a bit indecisive on some)

    Next I reviewed my stock portfolio against this scoring and found I have about a third of it in the likes of PG, JNJ, XOM and PM; another third or so in 'Hidden Gems' and the final third in Rio Tinto, Rolls-Royce and a couple of ETF's including EWZ (Brazil) and EPI (India)

    All in all an accurate set of questions and answers that work for me. Also an interesting way in which to spend 10 minutes downtime for lunch.

    Thanks Dayana, nice job.

  • Report this Comment On December 28, 2010, at 3:51 AM, Gr8Writer wrote:

    If you are a seasoned investor, yes, this quiz will probably do more to irritate you than help you.

    For more neophyte investors (aka newbies), this quiz may provide more insight into their thought process, and show them things from an angle they had not considered before.

  • Report this Comment On November 01, 2011, at 11:48 PM, kyftdidni wrote:

    @ LRMarbitrage

    "After this evaluation (I can provide the math for those who are interested) I have determined the fair price of one share of VLO to be around $91.33."

    Please help me out with the math. Thanks for your post! I'm still developing my investing philosophy.

  • Report this Comment On September 24, 2014, at 8:01 AM, mhseven wrote:

    Dear Fools:

    I found this very informative. I have been investing for about 30 years. BUT, I feel like a newbie as I bought mutual funds and what my broker advised. It sure didn't pay off in the long run as well as it should have. I am happy to be a foolish member.

    mhseven

  • Report this Comment On October 03, 2014, at 9:51 AM, Matrix248 wrote:

    While I respect the rational for discouraging older people from investing, it doesn't actually fit all. I'm 71 and will work until I'm 73 or 74. I was putting my savings in cash in a hiding place and in the bank - neither produced any income. I finally realized that I was better off investing in the stock market if I wanted more $ to supplement my SSI when I do stop working. I try to invest almost all my working income,

    and use the SSI for living and expenses.

  • Report this Comment On November 15, 2014, at 3:50 PM, cozycowboy wrote:

    After reading the article, I couldn't find myself. Some of this, some of that, etc.

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