Thursday, February 04, 2010

The 7 Levels of Market Participants

This was inspired by the 7 Levels of Photographers by Ken Rockwell, which was perhaps inspired by religion. Well, in any case, here are 7 Levels of market participants, with One being the lowest and Seven being divine. Enjoy!

Level One: The Tippee

The Tippee is someone who receives a tip or some advice and wants to make a quick buck out of greed. This level of market participants usually never had a brokerage account and decided that they should make a some money from the stock market bcos everybody else is doing it. They are inevitably tipped to enter the market by friends who give bad advice at the peak of the bull market and are inevitably burnt and vow never to return. Only to do so during the next bullish peak, again tipped by another friend. In normal times, they live their quiet lives in reality, having full-time jobs and enjoying themselves like other normal folks. This level includes grandmas opening a brokerage account for the first time in their lives, taxi drivers, housewives, first time unit trust buyers, retirees and primary school kids.

Level Two: The Amateur

The amateur is a market participant who decided that he/she should dabble in the markets and learn about the intricacies of the world of investing. They are usually bold, eager to learn but lacking in knowledge and information. The amateur spends time after school or work to read up and learn more. The amateur has the potential to reach the higher levels of market participant if he/she has the determination to pursue their goals to the fullest, devoting time to learn the tricks of the trade. This level usually includes high school students or undergrads, young working professionals, semi-retired, rational investors.

Level Three: The Tradee

The Tradee is a term that I invented meaning someone who gets traded by the market, ie being played by the market. Most tradees aspire to be hotshot traders earning $10k per month but lack the knowledge or the will to pursue their goal to the fullest. Most of them never attain the status of a trader (next level). Well if they did some rational thinking, they would realize even the hottest shottest traders don't earn $10k per month unless their capital base is like close to $1mn. And if you already have $1mn, why bother trading? Tradees also don't have a robust trading system and the emotional stronghold to withstand the markets. Amateur can become tradees quite easily hence this level also includes a lot of young working professionals, semi-retirees, undergrads, housewives etc.

Level Four: The Trader

Okay a small no. of tradees do evolve into traders. These guys make the cut by adhering to their robust trading systems and rules. They definitely have their emotions under control as well. Usually they have put in a lot of effort as tradees, learnt their lessons and have proven themselves. They quit their full-time jobs to trade, making good money (unlikely to be $10k per month maybe $4-5k). They do not blog, they don't argue in forums as to whether traders are better or value investors are better. They spend their time analyzing and thinking. This level usually includes mid career professionals, ex-army officers, ex-investment bankers, PhD students and civil servants.

Level Five: The Manipulator

Now we get to the interesting stuff. Manipulators are the big boys. Much like Gordon Gekko. Their investment philosophy is buy high, sell higher. They keep asking, where's my edge over the market. Things they do are in grey zones like buying ahead of earnings downgrade by analyst. They had lunch with the analyst and he hinted. They also engage in activist moves. Like accumulating a lot of Company ABC stock, then announcing some plan to restructure the company, to be led by a restructuring guru, who is their buddy. Technically, it is all still legal, but grey. These people would include big names like ex-remisiers, high net worth stock operators, hedge fund managers, ex-prop traders etc

Level Six: The Value Investor

Ok this is the level we are familiar with. We buy value. Stocks that trade at a margin of safety below their intrinsic value. Usually mundane companies with a history of stable earnings. We spend a lot of time reading annual reports, looking at financials and if possible talking to industry people, analysts, company management etc. These level can include a whole spectrum of people including working professionals, undergrads, old-timers, fund managers, retirees and bloggers.

Level Seven: The Legend

This is the pinnacle. This are people who have seen it all, been there and done that in the world of investing. Usually they have a knack for finding value but they also have a nose for a good trade, has good macro economics background and are very smart and very diligent. They would buy value stocks only when they see a catalyst for the value to unlock. This is unlike dumb value investors who would just wait and wait. They would also go for high probability trades - like shorting Korean Won or Thai Baht after analyzing and knowing that their central banks cannot defend the currencies. They have surpassed all levels and reached the pinnacle whereby their investment philosophy is no philosophy. Using the formless to combat form. Legends are investors with names that people from all walks of life would know of, like movie stars, famous scientists and world leaders.
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