Most people fail to appreciate the benefits of investing as they do not know which type of investors they are. Just like stocks, investors fall under three main broad categories namely, speculative, fundamental and prospective.
Returns or profits on any investment also follow the same broad investment principles hence it is important to understand which type of an investor you are to be able to understand the art of investments.
Failure to understand the type of investor can also lead to investing and disinvesting every often thus leaving one in the same position over time or even losing entire assets thus negating the purpose of investing altogether.
It is not enough to be a good investor by just putting money in investments but it is important to understand your investment class to be able to realize value in investing.
The first category of investors are fundamentals. A fundamental investor is one that looks at everything “right” in the investment. For instance, in a stock, they look at the market of the company, business strategy, corporate structure, risk factors amongst other good investment factors.
If such companies are not only able to have good cash flows from their businesses but also proven good dividend policies and yields over time. For property, a fundamental investor looks at the deal, the market segment, tax laws and expected rental income amongst other factors.
Fundamental backed stocks maintain their basic features like good cash flows despite periodic market fluctuations. If you invest in a good rental property, you can through rent, realize a regular cash flow.
So, regardless of whether the property goes up or down in value, you make money. Or if you build a thriving business, or bought shares of thriving businesses you will realize regular cash flow.
It is for this reason that fundamental investors are also known as sleep well investors as they can sleep peacefully knowing that they have gotten their investments in the right assets.
The second class of investors are speculators or risk takers. Speculative investors do not care about the essentials of underlying investments. They can gain abnormal returns or even lose entire investments depending on market conditions.
Some of the best know speculative investors have recently made big fortunes globally with cryptocurrencies. For those who have followed trades in cryptocurrencis like the much hyped Bitcoin know this.
The irony with speculative investments is that you don’t know the underlying value of your investments.
In most cases, there are no known equivalent assets to back such investments and even when they are overvalued or undervalued, you won’t know. The value of such investments are driven purely by prevailing market sentiments.
The reality is that smart investors do not invest in speculative investments. Renowned successful international investors are currently not investing in crypocurrencies despite the current exploding trading values.
Speculative investors are also known as feel-good investors. They often feel good when the values of their investments grow. However, speculative investments is the main reason why most people fail financially because they assume they are investors just because they put money into assets hoping they grow in value. When markets crush such investors lose their investments.
The other class of investors are prospective. Prospective investors look at opportunities presented by the investment focusing on eventual value. Unlike speculators, they are patient enough to wait for future potential.
Ultimately, they get handsome returns from their investments with time. Such investors are not swayed by short term volatility of investing markets as their investments are mostly guided by some predetermined objectives and principles.
So the question is, who is a good investor? Or put another way, who is a bad investor? Put differently, which is a good or bad investment? There are no straight answers to these questions. Just like risk, there is no good or bad investment.
Bad investments can be moderated by blending all the types of investments. Good investments is on the other hand determined by a combination of factors some of which include, source of funds and cost of the funds, your investment objective, risk and liability profile, investment horizon amongst others.
Most of the factors are however interlinked, for instance, you should not put retirement savings or credit in speculative investments.
To be able to fully understand what influences ones investment choice, which type of investor you are or which particular investments are good or bad, you would require professional advice to determine that.
The views expressed in this article are of the author and do not necessarily represent those of The New Times.