Find the Right Fit

 | Aug 31, 2011 | 2:30 PM EDT
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At last, the effects of Hurricane Irene are behind us. I didn't have to go to the convenience store for coffee this morning or fumble around in the dark to in order to take the puppy outside. Nor did I have to spend the morning in a bookstore or restaurant with an internet connection looking for an empty corner table near an electrical outlet. It's a good feeling to be back in my messy little office and have time to catch up on news and information. The stock market is up a bit, the American League East is the tightest pennant race in all of baseball, Europe's a mess and the Federal Reserve is chatting about additional stimulus. Apparently, I didn't miss much.

What I did miss was the most recent version of the technical vs. fundamental argument. I love this discussion because it's one the silliest arguments in the history of investing. It ranks right up there with the growth vs. value argument. I have friends who trade individual stocks strictly off charts and have no clue what the company actually does. I have other friends who can tell you the cost of each component of a company's product and the potential impact that a late arrival of a morning commuter train in Beijing might have on the company's profit margins. Both groups of friends have done very well over the years.

I'm always amazed at how dogmatic people become about their methodology of trading or investing. Technicians swear that fundamental investors are idiots. Fundamental stock pickers accuse chartists of being too lazy to do the real work of analyzing balance sheets and income statements. Stock traders think the futures and options crowds have a death wish. Options people think stock pickers are just bad at math. Growth investors think value types are curmudgeons, and the value folks think the growth and momentum crowd is made up of a bunch of cockeyed optimists. It's like trying to get a Red Sox fan to admit the Yankees have a good team this year or vice versa.

The first big secret that I discovered over the years was that the best approach to trading and investing in stocks is the one that works for you. I have adopted the deep value approach and it has worked very well for me. It fits my personality and lifestyle. However, if you have a deep math and statistical background, options or arbitrage trading might be a better fit for you. If you are comfortable with buying exciting new companies as they move to new highs, then growth and momentum investing could work much better for you than the watching-grass-grow approach to investing in stocks. The key to long-term success is finding and perfecting an approach that works for you and fits your personality and skill set.

People usually get into trouble when they gain only a superficial knowledge of a subject and attempt to conquer the markets. Whatever approach you use, you must be willing to learn it inside and out. If you are going to be a value investor, you have to understand how companies are valued in the markets, as well as in the real world. If you are going to trade options, you need to acquire an in-depth knowledge of options pricing and volatility. None of this is easy, and to assume you can read one book and be a winner in the markets is an unrealistic view.

The other big secret is to learn from those with a different approach than yours. Having an idea of what growth investors, options traders and the guys in the futures market are doing has made me a much better value investor. Having a working knowledge of private equity and venture capital investing has also helped me to profit over the years. Learning options, in particular, has added an enormously profitable tool to the kit and has improved my performance over the last decade.

The right approach to the markets is the one that works best for you.


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