"To Thine Own Self Be True!"
This old advice rings true for modern-day investors!
Your temperament, your inner spirits should guide you in making investments. If you are a conservative, risk-averse person, then don't kid yourself. Face up to it, and invest accordingly, which means conservatively. No one can put a price tag on your ability to sleep soundly at night!
On the other hand, if you're more venturesome, more willing to accept higher risk in return for the potential of higher reward, you should be able to act more aggressively in the market.
Most people invest for different reasons at different times and use various methods. Whatever approach, or approaches, you take, the most important thing is to know why you bought a particular stock.
If you bought a stock on the recommendation of your neighbor or your broker, be happy about it and recognize that this is why you bought it!
Then you will be more likely to avoid the "investor imperative," namely the following behavior:
If your stock rises, claim it as your ability ...
If it falls, pass on the blame!
Your friend phones. He has the perfect story on a great stock but you will have to act quickly! If you are likely to buy in this situation, then you are a friend investor. Friend investors rely on the advice of other people to make their decisions.
Moving averages, candlestick patterns are the sort of things the technical investor deals with. Technical investors were once called "chartists" because their central activity was making and studying charts of stock prices.
Nowadays this is usually done on a computer where advanced mathematics combines with grunt power to unlock past patterns and correlations. The hope is that they will carry into the future.
This type of investor bases his decisions on forecasts of economic parameters. Typical statements are unemployment will decrease, interest rates will climb etc.
Random Walk Investor:
I have no idea whether stock XYZ will go up or down, but it has a high beta! Since I don't mind the risk, I'll buy it since I will, on the average, be compensated for this risk.
The current price of a stock is what you should buy, or sell, it for. This is the fair price and no amount of analysis will enable you to do any better.
Informal Information Investor:
This approach to investing consists of piecing together information on companies obtained informally through wide-ranging conversations, interviews, press-reports and, simply, gossip.
This investor attempts to value a stock independently of its current market price. This independent value has many names such as intrinsic, investment, reasonable, fair, and appraised value.
An intrinsic value would be the value which is justified by the facts: assets, earnings, dividends, definite prospects, including the factor of management.
Value investing is the method of deciding on individual investments on the basis of their intrinsic value as contrasted with their market price.
They are looking for stocks with high price to book value or a high price-earnings ratio. Growth is always a component in the calculation of value, constituting a variable of high importance and positive impact.
This type of investor overlaps the types just mentioned. Increasingly investors are respecting their own beliefs and values when making investment decisions.
Many others are following their own paths to clarify their investment values and act on them.
The process of bringing as much honesty as possible into investment decisions we call Conscious Investing.