Jagoinvestor

December 18, 2010

3 categories of Investors, which one are you?

Suppose you have 3 buckets, and you have to put each kind of investor into those buckets!. What would be the criteria you will use?

In my experience of dealing with hundreds of readers and dozens of clients till date, I can categorize them in a very interesting manner which shows their knowledge and attitude towards personal finance. I call it “I know” or “I don’t know” model. If you look at all kind of investors, at a broader level, you can put them in 3 categories.

Lets see each of them and you can identify which one you fit in.

Categories of Investors

1. I know that I don’t know

The first category of investors is very basic and large in number. They are not very much familiar to personal finance concepts and how to manage their financial lives and mostly they have no idea on how good or bad their financial lives are.

These people are mostly careless in this area and don’t give sufficient time to manage their financial life. They take it as it comes. Many a times they are great in their respective fields, may be one of the best performers and very smart in what they do, but when it comes to personal finance or managing their own money, they are clueless.

People in this category are aware about the fact that they are not good at personal finance and they need assistance when it comes to recommendations, calculations or any kind of basic planning in area of money. They are lost in this overloaded world of information.

Who falls under this category?

Most of the salaried class people fall in this category. Software engineers, doctors, media personals, defense-personals and even self-employed. At times people related to finance like CA, CS, MBA finance also fall in this category!

Whats common in each of them is that they are modest enough to realize and accept that they don’t know. If you ask them simple question like “Does term insurance make sense compared to Endowment Policies ?” (read this and this), they would be very confused and might not come to a strong conclusion on their own. They will not have much idea on how to start.

Anyways, the point is not whether they know how to do it or they don’t, the point is, if they are aware about this fact that they know or they don’t!

People in this category get mis-sold by agents and often take wrong decisions because of tricks applied by marketers and often they feel that the other person is smarter and knows better than them. That’s the reason they fall prey. Most of the readers here I think would be falling in this category and they are constantly trying to shift to the 3rd category which we will discuss !

2. I don’t know that I don’t know

This is an interesting category. Just like first category, even people in this category don’t have much idea or have wrong concepts in area of money, But the main difference in this category is that they are not ready to accept the fact that they do not know things, but they feel that they know enough, and live in their own world with their own understanding whichΒ  in reality is incorrect.

They have their own way of looking at things and suffer a lot in their financial life because they have no idea what they are doing. They are actually not very smart in personal finance, but they “feel” that they are.

Finance is justΒ some math’s and number’s game

Ironically, some of these people are very smart and intelligent in other areas of life. So much, that intelligence now comes on the way to their financial life. They assume that they know everything very well and are not open to listen to other views and learn from that.

They consider personal finance as something which they can excel easily, just because they have been successful in other things in life. After all its just some maths and numbers game, as they feel so ! . Interestingly not just investors but lot of agents and advisors also fall in this category. A lot of misselling which happens is accidental at times and not intentional. These agents/advisors do not have any idea that they are actually misselling.

They do it thinking that they are doing a great job. They themselves are not aware that they have missold accidentally, believing in what they were told in their sales-meetings.

Let me give you a personal example:

I used to talk a lot about Insurance commission and how insurance agents make huge commissions compared to Mutual funds. At that time I was not aware of the fact that mutual funds commissions are paid on AUM basis.

argument on insurance and MF AUM commission

I used to make my own theories based on calculations for some hypothetical examples. Even I use to argue with many Insurance agents on the commissions structure, some of them told me that even mutual fβ€Œunds have high commissions, but I used to think that they are referring to the high ticket transactions only, and trying to cover themselves.

I was in this category because at that time I was not accepting that even mutual funds have AUM linked commissions and I used to just argue with them based on my ignorance. So I didn’t knew some important information and I didn’t knew that I don’t know.

In the same way, people in this category do not have proper understanding of basics, but instead of accepting it, they have some other kind of knowledge or wrong knowledge and notions and based on that they mess up their financial life.

3. I know that I know

Last section but a very small one is of people who understand truly what they say and suggest in personal finance. If you ask them some question, they would be very confident in what they tell you. This comes from the confidence, which is result of experience and deep self-learning in personal finance.

These people use their mathematical and analytical ability to understand what is right and wrong. You can find many of these people on this blog and our helpline Forum :). A lot of people from “I know that I don’t know” category get promoted to “I know that I know” in some months or years.

An experiment:

Try this!. If you ask a question like “Does term insurance make sense compared to Endowment Policies ?” to these people, they would eventually come out with the right answer even if they do not know.

They would not need any guidance or very little guidance and they would take this kind of problem as a pure logic based comparison questions and will try to compare both term plan and endowment plan from different points and would come up with a conclusion that Term insurance is the best way of Insuring one’s life and it makes sense to invest the rest money in some other product.

Also, if you don’t tell them how much return one can expect in long run, they would still find out somehow how to look at historical returns and equity is less-risky in long run ! . They are like a new-born baby who was not told anything, but they just start doing what needs to be done somehow.

What category are you in and What should you do ?

Which ever category you belong to, your final goal should be to get into 3rd category where you are aware of everything yourself and you can guide even others.

To eventually reach 3rd category, you have to do just one thing, whenever you are in conversation or debate with anyone, have an open mind of discussion and be open to accept that you can be wrong and might not have some information. Be ready to learn things from other person. With time you will slowly reach 3rd category .

These 3 categories are not just for personal finance, you can categories people in these categories for any area of life and solution to reach 3rd category is still same what I suggested above. Do you think there can be other categories than these 3 discussed above ?

Which category are you in currently ?

Did you shift from one category to other by reading this blog ? Share ! . Also have a look at these unansweed questions on forum Incase you can help in answering them. And if you are wondering why there is less activity on comments section, I am on vacation for your info !

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Soumyajit Ghosh
Soumyajit Ghosh
11 years ago

Hi Manish,

Myself Soumyajit Ghosh from Kolkata , West Bengal . At present I’m pursuing CFPCM and so far I’ve cleared all the basic modules and will appear for final exam soon ( probably end of current month ) .

I’ve passsed graduation in Engg. from B.E.S.U ,Shibpur. Is there any posssibility to get a job in Bank after completion of CFPCM . And what will be the salary expectation . I had 3yrs 8 moths experienced in Bank , however currently unemployed.

Then what will be the role in aBank and salary expectation ?

I’ve received interview calls , but all from insurance sectors .

sreenivasan
sreenivasan
12 years ago

Very good article. Forward the question to analysis where i stand on the above three category.

Thanks
Regards
Sreeni

Jitendra Solanki
Jitendra Solanki
13 years ago

Hi Manish,
Very nice article.I met maximum clients who fall in category 1.

category 2 is indeed very dangerous and not long ago, but two days back only i met a friend who was is a wealth manager in one of the bank and trying to do financial planning for a client who has asked for such services.Imagine, he is doing it through calculators available on the web and is confident that financial planning is not a very big deal.

Jitendra

Jitendra Solanki
Jitendra Solanki
Reply to  Jagoinvestor
13 years ago

very true Manish.

vijaya
vijaya
13 years ago

Dear Manish ,
Nice Article.
But , hope all 3 type of Investors are not ‘3 Idiots ‘ style-investing in market , as the photo supporting the article (In lighter sense pl.) .
Congrats..,

Ahmad Zaib
Ahmad Zaib
13 years ago

Hi Manish,
I first stumbled upon your blog while searching info abt PPF a/c. Google throws your site at the top in the results πŸ™‚

What I didn’t know was I have incidentally come face to face with an ocean of knowledge in the field of financial planning.

Since that day I got hooked on to your blog and let me honestly say that I’ve learnt loads and loads, which otherwise I would be unable to by any other means. As a result, I have now invested in MFs, about which for a long long time I had just heard and not delved in to the details.

I can happily categorize myself in Category 1 πŸ™‚ as I feel that I know quite a bit and striving to know more and more!

Will try harder to get promoted into Category 3. And I know such nice and generous people like you are the right way to achieve that!

What a blog man… what a blog!

I can surely part with some %age of my SIPs to people like you πŸ™‚ [though I do my part by clicking on the ads for now ;)]

Thanks a lot man, you changed my life!

~ Zaib.

Ahmad Zaib
Ahmad Zaib
Reply to  Jagoinvestor
13 years ago

Indeed Manish, indeed!

Today I finally spread the word about your blog on my FB a/c. I have never promoted anything with so much of an effort ever…

You can check out my profile πŸ™‚
http://www.facebook.com/ahmad.zaib

My efforts are now to bring as many friends of mine as possible to your blog πŸ™‚ At least I can do that much…

Thank once again Manish!
God bless you…

Ahmad Zaib
Ahmad Zaib
Reply to  Jagoinvestor
13 years ago

πŸ™‚ πŸ™‚

Ahmad Zaib
Ahmad Zaib
Reply to  Jagoinvestor
13 years ago

I also sent you a FB frnd request long ago, but it still remains unanswered πŸ™

Bharath
Bharath
13 years ago

Manish,

First of all thanks for the great work. i dont think i fall under any of the above categories. i dont even know wat endowment is. but after reading this article, i came to know that i got to learn a lot. thanks a lot for being an eye opener for ppl like me. i know u r repeatedly getting this comment:) but its a heartfelt one. thanks again. gonna see those archives now:)

Bharath
Bharath
Reply to  Jagoinvestor
13 years ago

Thanks Manish:)

Ashish
Ashish
13 years ago

I am in 1st and spent my whole weekend reading blogs 1 by 1… having fun as of now

Kunal Shah
Kunal Shah
13 years ago

Many I know fall into the 2nd bucket. I do not want to brag about myself πŸ™‚
but I am here at this blog to learn, learn and learn…

Dinesh
Dinesh
13 years ago

Type 2 is absolutrly dangerous. I was a type 1 and due to my job conditions whre I had to stay away from INdia(I am in merchant navy) I could not catch up on the scene. but I made it a point to study on my own from websites about personal finance and articles from leading CFA in news paper and websites. Today I have obtained a sizeable knowledge and going through books on taxatation, portfolio management to gain more knowledge. Money is compared to shit(donot get me wrong), you have to clean your own not even the richest person anywere in this world use the help of anyone to wipe his ass.

Ravi Shankar
Reply to  Jagoinvestor
13 years ago

Hi Manish , Dinesh ,
I did not get the relevance of this statement here :β€œMoney is like your shit , you have to clean yours! , no body else help can clean it” !
If I fall in to first category should not I take the advise of a Financial Planner or a Friend who is a Financial Genius !

Regards,
Ravi Shankar

S S
S S
13 years ago

I stayed in “1” for long time and gradually shifted to “3” the transition is not yet complete. Obviously I didnt want to learn earlier, persistently refused to read anything related to finance. A big help came from your blog where complex situations were made easy.

Smart Singh
Smart Singh
13 years ago

Yes, the most dangerous type is the 2nd type. I come across a lot of friends who have strong opinions about Real Estate, Gold and Trading. Any self-respecting financial planners would suffer from internal bleeding if she hears these theories.

Apart from all behavioral biases, one big reality is that their beliefs are sometimes based 1 OBSERVATION! If buying a house worked well for someone, she’ll advice all and everyone to buy a house. If someone made some money on a random stock tip, he would become a raging bull (until he learns it the hard way). People don’t even wait for 4-5 observations before forming a belief!

Smart Singh
Smart Singh
Reply to  Jagoinvestor
13 years ago

Thanks Manish,
I really like what you are doing. I just want to take a lighter approach. Do you have a blogroll or guest blogs where I can feature?
I have added your site to mine -> http://www.smartsingh.com/blogroll

Shinoj Jose
Shinoj Jose
13 years ago

The sad part is that people who are very good in other ‘worldly matters’ are too bad when it comes to finance. I know IIT graduates who are very good in creating software, but don’t know the basics of finance and investing. Every year during Jan/Feb they ‘invest’ in some useless ULIPs and insurance policies and guide others to do so.
Thanks and Regards,
Shinoj Jose

srinivasu
srinivasu
Reply to  Jagoinvestor
13 years ago

every word is true.
thanks for this service !

Jagbir Singh
13 years ago

Very good observations, Manish. Now what I can see here is that you want people to tell themselves in which category they are in.. but I think most of them do not know themselves where they are? like your example about mutual fund, may be you have another perception about something else and later you discovered that you need to change it but then at this moment you are in category 2 and you might not accept it .. πŸ˜€
I think category 3 have very few people in it like 2-3% only in true sense and may be most of us are not in it. May be I’m wrong as well because there seems many experts here. In any way, one thing is confirm by following your articles and discussions, anyone can help himself to promote to next category.


Jagbir

avinash
avinash
13 years ago

Hi Manish,
first and foremost congrts for being able to categorise people , this is something which requires tremendous study to come with such generic classification for so many variables.it looks simple and thats where you have won!

Secondly, it cud be very usefull for an average guy to get guidelines from you and for that matter anybody from this forum to give a few tips and steps to upgrade from category 1 to 3.

avinash
avinash
Reply to  Jagoinvestor
13 years ago

Hi Manish,
All the while i was thinking in which category do i fall in. i know a few things,thanks to ppl like you. and i do not know a lot of things thats implies studying more and learning to learn more.

It surely requires a lot of interospection and i m happy atleast i gotta chance to think that way and hopefully i may be of category 1
.

Hemant B
13 years ago

Hi Manish,

2 type is most common & most dangerous πŸ˜‰

I am also working on a similar article which is going to be published in one of the magazines.