If you are interested in investing, you might have wondered what type of investor you are. There are many ways to classify investors, but one useful framework is based on the time horizon, the focus, and the goal of each investor. In this blog post, we will explore four common types of investors and their characteristics.

• Trader: A trader is an investor who operates with ultra-short time horizons (from minutes to weeks) and tries to predict price movements based on historical patterns or market reactions to certain events. A trader does not care much about the fundamental value or the long-term prospects of an asset, but only about how other investors will behave in the short term. This is a very difficult and risky strategy, as it requires constant monitoring, high-frequency trading, and accurate forecasting of market psychology.
• Price-Based Investor: A price-based investor is an investor who has short time horizons (from months to years) and tries to anticipate how other investors will react to future or realized market or macro factors. A price-based investor may use some valuation or fundamental analysis, but only to understand the positioning and expectations of other investors like them. A price-based investor aims to capture price trends and momentum, and to exploit market inefficiencies or anomalies. This is a popular and comfortable strategy, as it aligns with our natural biases and storytelling abilities, but it is also very challenging and competitive, as it requires frequent and timely decision making, and often involves following the herd or chasing fads.
• Valuation-Based Investor: A valuation-based investor is an investor who focuses on the fundamental attributes and the fair value of an asset, and tries to identify and exploit mispricings based on rigorous analysis of cash flows, growth, and risk. A valuation-based investor has long time horizons (from years to decades) and does not care much about short-term price fluctuations or market noise, but only about the intrinsic value and the expected return of an asset. A valuation-based investor aims to buy low and sell high, and to achieve superior long-term performance. This is a sound and rational strategy, but it is also very demanding and stressful, as it requires patience, discipline, and conviction, and often involves going against the crowd or enduring periods of underperformance.
• Passive Investor: A passive investor is an investor who seeks to invest in a diversified and representative portfolio of the relevant asset class opportunity set, and tries to minimize costs, taxes, and turnover. A passive investor is agnostic about valuation, and does not try to predict or exploit market movements, but only to capture the long-term, structural risk and return of each asset class. A passive investor may not believe that markets are efficient, but that there is no reliable and consistent way to beat them, especially after accounting for the effort and the behavioral stress involved. A passive investor aims to achieve the market return, and to avoid the pitfalls of active investing. This is a simple and sensible strategy, but it is not without challenges, as it requires doing nothing, accepting mediocrity, and ignoring extreme valuations.