Investing greats are often known for their unique style of investing. The moment you hear of value investing, Warren Buffett leaps to mind; Peter Lynch reminds us of growth investing; Howard Marks of distressed debt; George Soros or Stan Druckenmiller are known for their macro trades; Jesse Livermore, a trader. And the list goes on.
It is important to know your own dominant style of investing. There would be something where you would be most comfortable in. For example, my natural inclination is to buy stocks that are compounding in nature and then sit and do nothing as long as they keep on performing both on the business and stock price fronts. The problem starts when we become slightly successful in our style of investing. Due to our ego, we tend to believe our way of investing is the best and others are sub-par. And then, we look for confirmation from the external world.
If we are traders, we deify eminent and successful traders; if we are investors, we do the same with famous investors. And that is why you will find fundamental-based investors deride technical chartists and vice-versa. This also puts subtle biases into our minds based on the authority and commitment and consistency biases.
For example, a generation of investors blindly followed Buffett and avoided tech stocks just because he said it was not within his circle of competence. And guess what, they missed the best companies and winners in the last 20 years – Google, Apple, Microsoft, Amazon, etc.
Most of the people typically start investing in either the technical or fundamental side, based on how they started their journey and what influenced them. And over the years, they keep on getting better at their craft. Very few have the curiosity and courage to take a peek at the other side. And even for those that do, it is not easy to be successful. Trading and investing require two completely different and mostly complementary mindsets, and very few can actually do well in both.
When the market is booming, it seems almost impossible to sell a stock for any amount less than the price at which you bought it. However, since we can never be sure of what the market will do at any moment, we cannot forget the importance of a well-diversified portfolio in any market condition.
For establishing an investing strategy that tempers potential losses in a bear market, the investment community preaches the same thing the real estate market preaches for buying a house: “location, location, location.” Simply put, you should never put all your eggs in one basket. This is the central thesis on which the concept of diversification lies.