I once heard a comedian describe a circle of coolness. His point was that everyone sits somewhere on an imaginary circle and that at the top you have very cool and then you work round clockwise to cool, slightly cool, not cool or uncool, uncool, nerdy and end up virtually back where you started as a complete and utter nerd. The joke, if you like, is that the complete and utter nerd and the very cool individual are virtually at the same point of the circle; there is a cigarette paper’s difference between them. Just a small change and you can move from complete and utter nerd to very cool or back in the blink of an eye. So that floral jumper can make you look like the coolest dude in the neighbourhood or a complete Wally.
This idea seems to work in the investment world as well. At the top of the investment circle you have highly successful investors/traders, taking huge risks, huge positions, making extraordinary returns. Slightly to the right of this you have a less risky approach but still highly successful, moving round to more cautious investors making tidy returns, through completely safe investors making small returns but taking no risks, round to unsuccessful investors taking a bit of risk but getting no meaningful return for their risk, up to out and out gamblers risky it all and ultimately going bust. The first mentioned and the last mentioned sit right next to each other on the investment circle.
There is a whisker’s difference between the high rolling, buccaneering investor who makes a fortune and the bankrupt gambler. They sit very close to each other on the circle. They are probably doing virtually the same things but with the minimal difference that one gets lucky and the other doesn’t. One man’s fortune making attack on the market is another man’s calamity and road to ruin.
If you have a million to invest you can decide to turn this into £5 million by betting huge sums that the dollar will fall against the pound. Currently there is around $2 to every £1. Imagine that you went into the market trading £1,000 for every cent the dollar falls. That means every dollar drop makes you £100,000 so the dollar drops to $1.50/£1 you make 50 x £100,000: £5 million! However what happens if you get it wrong and the dollar shoots up to $2.20/£1: you lose £2 million! One way you’re a hero, a star, a “player” who has the Midas touch, the other you’re a “has been”, a loser and a bankrupt.
The wheel of fortune is very much like the circle of coolness, at the very top there is not a lot between the hero and the villain.
What each and every investor needs to make sure is that they know where they stand in relation to this circle. I would suggest that for the vast majority of the investment community the best place is somewhere towards the bottom of the circle just to the right. Keep risks low but try to maximise rewards. But it is important you can identify exactly where you stand and what type of investor you are. My strong suggestion is that whether a novice investor or an experienced hand you regularly review your position and look at your investments. They WILL tell you what type of investor you are, which may not be the same thing as what type of investor you think you are or what type of investor you want to be.
Any investment strategy and plan must start with the understanding that you are a certain type of investor and putting time and effort into this has to be both the starting point and one of the most important parts of the investment making decision process.
