There are many ways to reach success in the stock market… but just like in politics, other people’s methods are often disregarded at best and attacked at worst. Traders think Investors are boring old stiffs while Investors think Traders are mindless morons. You often see different classes of investors mocking each other’s blogs - technical analysis articles attracting the wrath of the ‘serious investor’ while intelligent stock pitches often just plain ignored by the trading community.
I’ve long felt that this dichotomous labelling of “investors vs. traders” is counter-productive. It’s just like trying to shoe-horn everyone’s political views into the ‘left vs. right’ political spectrum. The reality is that people’s behaviour is much more nuanced than this and it’s time we found a better lens.
So in this article, I’m going to propose a more unified understanding of investor archetypes that I hope helps bridge the divide.
The Four Investor Suits
I once spent six months as a professional poker player, mostly online, but with regular excursions into real world tournaments. Multi-tabling at poker quickly becomes a grind which is why I moved on, but this love of gaming has been with me throughout my life and informs my view of markets.
It was while exploring some gaming resources after some recent battles with my kids that I came across Bartle’s Taxonomy of Game Player Types - a deceptively simple system that classifies online game players as one of four archetypes (explorers, killers, achievers, socialisers). Bartle imaginatively maps these four classifications to the four suits of a card deck. It’s a very simple model, but has been very broadly adopted by gaming enthusiasts.
I swiftly realised we could adapt this model to investor types. The more I thought about it, the more I realised it could help avoid the simplistic divisiveness of the “investor vs. trader” war.
So here goes.
Let us analyse investors according to two simple dimensions.
- Action Dimension - from ‘active’ to ‘passive.’
- Decision Dimension - from ‘systematic’ to ‘discretionary.’
Active investors like to deal frequently, often holding shares between days and months. Passive investors prefer to hold their shares over longer time frames from months to years.
Systematic investors tend to use rule-based, objective approaches to buying and selling shares based on theory or experience. Discretionary investors tend to use their own subjective decisions when buying or selling shares based on judgement, common sense or intuition.
By applying these two dimensions as axes on a grid we can map out four investor archetypes: Trader, Hunter, Farmer, Owner. As we’ll see, each of these investor types maps very well to one of the four card suits - Clubs, Hearts, Spades and Diamonds.
The more I’ve thought about it, each of these archetypes:
- profits in the market from a different set of return drivers
- holds positions across varying time frames
- has a different core motivation
- gains decision confidence from different sources
- favours their own set of idea generation tools
- suffers from a different set of behavioural biases
- can be represented by different ”card royalty.”
So I’m now going to delve more deeply into each of these archetypes, explain the terminology and hopefully encourage a dialogue. My hope is that this might help everyone come to respect each other’s different approaches to the market.
1/ The Trader - Clubs
The trader is one of the most active and dominating of the archetypes, best represented by the suit of clubs. The trader seeks return drivers through trend following and swing trading, often across shorter-term time frames. They often have a keen motivation to win which is why so many ex-sports players are attracted to trading practices. They keenly watch market action to identify entry/exit points, favouring practice & experience as a source of decision confidence. They are most likely to behaviourally suffer from the illusion of control and over-confidence that may lead to over-trading. Trader royalty include Mark Minervini, Bill O’Neil as well as countless others.
2/ The Hunter - Hearts
The hunter is the most social and emotional of the archetypes, and thus best represented by the suit of hearts. They seek mispricings as return drivers to generate alpha. They often invest over medium-term time frames to allow these mispricings to correct, and have a keen motivation to stalk the market. They are keen socialisers, listening to networks of smarter investors to generate ideas, favouring their intuition as a source of decision confidence. They are most likely to suffer from confirmation bias due to a tendency to collect supporting information as well as a tendency towards over-optimism. Hunter royalty include George Soros, and even our very own Paul Scott.
3/ The Farmer - Spades
The farmer is a pretty rational type best represented by the suit of spades. They seek beta return drivers through factor investing techniques. They often invest anywhere from short- to long-term time frames depending on the factors targeted and are motivated by harvesting market rewards. They tend to generate ideas by sorting the market through the use of databases and gain decision confidence through theory and evidence. They are most likely to suffer from data-mining bias in their techniques as behavioural biases. Farmer royalty include quants like Cliff Asness and James O’Shaughnessy. I classify myself very much in the farmer camp.
4/ The Owner - Diamonds
The owner is often archetypally the older and wealthier investor best represented by the suit of diamonds. They seek the power of compounding and dividends in high-quality stocks as return drivers. They often seek to buy and hold over very long-term time frames and are motivated by accumulation. They generate their ideas through reading annual reports and financial statements analysis. They gain their decision confidence from perceived common sense and good judgement often learned from years of experience. The major behavioural biases that flaw the owner is attachment bias which leads to the opportunity costs of loss-aversion. The King of owner royalty suit is Warren Buffett.
|Royalty||Bill O'Neil||George Soros||Cliff Asness||Warren Buffett|
|Return Driver||Trends / Swings||Alpha / Mispricings||Beta / Factors||Compounding / Dividends|
|Time frame||Short Term||Medium Term||Medium Term||Long Term|
|Bias||Over-confidence||Confirmation bias||Data Mining Bias||Attachment Bias|
“Which type is best?”
The interesting thing about the archetypes is that they are all valid. There are proven investors that have used each approach to generate fortunes. Not through luck, but through the skilled development of their style, managing their biases and by targeting specific return drivers.
All the return drivers mentioned in each quadrant are proven empirically to generate value. Trends/swings, stock picking alpha, beta harvesting, compounding dividends - each are valid approaches. I hope the above analysis helps encourage a more nuanced take on the dichotomous and often disrespectful “investor vs. trader” battle. Ultimately all investors are traders…. each buys and sells, they just have different time frames and approaches to the market.
There is a balance to all things
It’s also worth understanding that markets often reflect the output of all the players within them and will adjust to correct any imbalance. Whenever any current investing approach becomes too much in ‘vogue,' it may mean there are greater opportunities in other styles.
I remember back in the dotcom bubble when every Tom, Dick and Harry became a “Trader,” and long-term fund manager “Owner” investors lost their jobs for being old-fashioned. What goes around comes around - the traders went bust and there were years of good fortune around the corner for traditional approaches. I’m sure that in this current era where so much money is moving into factor-based ETFs (the “Farmer” archetype) that at some point the pendulum will swing too far once again.
Of course, all these suits are archetypes and I’m sure only a few people find themselves fitting neatly into a single category. Many may reflect that they have migrated from suit to suit over time, and I wouldn’t be surprised if most people see themselves as having both a major suit and a minor suit.
Experience tells me that the majority of investors begin their journey firmly as a Heart - in the “Hunter” category - which also ironically can be the most dangerous.
While I’ve always generated my ideas from data, when I started investing I validated them online through bulletin boards, which led to huge over-optimism and resulting over-exposure. I’ve since learned from my early mistakes, and have found a process that handles my own emotional attachment better. I’ve migrated firmly towards the “Farmer” approach and have replaced the heart with the spade.
I’d be fascinated to hear the community’s comments on these ideas and I hope regular commenters will share their own major and minor suits. I would welcome any comments to improve the model or other traits that you consider associated with the suits.
Here’s a bigger schematic of the idea.