The secret life of the sceptical investor

Over the last couple of Fridays we've been looking at Derrick Niederman's seven types of investor. So far we've tackled the bargain hunter and the visionary.

Today I want to introduce you to the sceptic.

Sceptics can be fantastic. They're always keen to take the other side of an argument, and that makes for interesting debate. Sceptics find problems that happy-go-lucky types miss. That's why a sceptic can make a great investor.

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But to achieve greatness, he will have to fight some deep-rooted biases. Character traits that can seriously hamper stock market returns.

Before we tackle them, let's first see if this sounds like you:

You don't play the lottery. Or you'll only play on the rare occasion that the prize fund is so large that the odds are in your favour.

In sport, you play defensively. You don't go for the glory shots.

You'd rather miss out on a potential profit than risk losing your money on a risky stock.

You do all your own research on stocks. You don't trust the motives of tipsters.

You wouldn't pick a fiver up from the pavement. If it were real, someone else would have had it!

Let's look into the character of this guy.

You're too smart - or you think you're too smart

Mark Twain said: "Anyone under 40 who is a pessimist knows too much. Anyone under 40 who is an optimist knows too little"

Scepticism is all about knowledge. And a sceptic comes across as knowledgeable. It feels much smarter to pick out problems than to smile and simply accept what others tell you. A young sceptic will question and try to rationalise everything, and as he ages he'll begin to pity the foolish optimists.

Before investing, a sceptic will diligently study the company accounts. He won't be fooled by any accounting shenanigans. He'll see through all the hot air that all too often spouts from company management too he's nobody's fool.

This thoroughness can keep a sceptic from serious losses. But more often than not, the sceptic isn't quite as smart as he thought he was.

Academics are the greatest sceptics of all. Their academic intelligence might suggest that they'd be star fund managers and investors.

But when two Nobel Prize winning economists got involved with hedge fund Long Term Capital Management (LTCM), they nearly brought down the whole financial system!

So sure were they of their smart and rational thinking that they made highly leveraged bets in the bond markets. When they started to go wrong, they just placed larger and larger bets safe in the knowledge that they were 'right'. It turned out that they were wrong!

While most investors accept their own fallibility, the sceptic cannot. His thoroughness can perversely make him too cock-sure and blinker him from dangers.

If you're not in, you can't win

The second affliction of the sceptic is his very cynicism will keep him from profitable trades. Sometimes the market just isn't for rationalising. Far from being a land of rational types, the markets are made up of all sorts of weird and wonderful investors.

The sceptic's negativity holds him back. While everyone else is out there playing, having fun and making money; the sceptic stays at home.

The sceptic may not even like stocks at all his conservatism may lead him to bonds and cash. And of course, there are times when this is the right thing to do.

But far too often, the fear of making a loss and potentially feeling stupid means that he's out of the market.

With stock investing you've got to be 'in it to win it.'

You must find the right people to trust

The sceptic rarely listens to others. He only trusts his own work and he doesn't trust the motives of others. I have to confess, there's a bit of this in me. But I fight these urges.

I know that there's an awful lot of useful stuff out there and I've learned to trust the work of others.

The key here is to find people you really trust. And if you're a sceptic, you're only likely to trust someone that's on a similar wavelength to you.

And if that sounds like you then I've got something you might just like. The Fleet Street Letter is a newsletter with an investment team that shares a very healthy cynicism.

73 years of making big calls here's the latest

But despite their often dim view of the market, the team looks to find ways of playing it for a profit. They've made some outstanding calls in the 73 years of being published (it's the longest-running UK newsletter.)

There's always a way to play the market whichever way it looks like its going. Don't let healthy scepticism keep you from making money.

Have a look at the latest big call from these guys. It's already upset some readers, due to its predictions. But it's well argued and if you see it right to the end, you'll find out some pretty smart investment ideas.

This article is taken from the free investment email The Right side. Sign up to The Right Side here.

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