Investor Levels by Ability and Results

Level 0 - 40% of all investors

• Invest based on hot stocks mentioned in the media and/or stock tips from friends or influencers on social media.

• This is pure speculation. Most of the time, returns at this level will be negative. Some people will make money, and the FOMO they spread is what keeps this speculative circle going. Important thing to note is no one consistently makes money at this level.

Level 1: ~ 20% of all investors

• Invest in low-cost, passive market index ETFs or mutual funds like S&P500, BSE Sensex 30, FTSE 100 etc

• This is the safest best for those who are not knowledgeable and don’t want to take unnecessary risks. Their returns will match the market average (minus the low costs). The only issue is there is no excitement in this and investors won’t be able to boast about their wins with their friends

Level 2: ~ 20% of all investors:

• Invest in active mutual funds. May have business understanding and high level financial metrics such as P/E or “value” and “growth”

• Returns vary, depending on how good the fund manager is, and how high are the costs. Choosing particular industries based on own knowlege (from profession) may raise returns.

Level 3: - ~10% of all investors

• Invest based on business understanding and some level of finances including revenue, cash flow and asset/liabilities etc.

• Results are be around the market average, or better if there is insight into the business or the investment is done during a market panic, and held onto a market euphoria

Level 4: ~ 8% of all investors

• Invest based on deep business understanding and thorough knowledge of financials

• Results are above-average over long periods. The only risk is of panic sales when the market is down.

Level 5: ~2% of all investors

• Invest based on deep understanding of economy, industry, business and underlying finances, and emotional control

• Returns that beat the market in any long-time period. This level of investing only fails when the investor loses patience or panics. With experience, as the investor goes through market cycles, this risk goes down, and rewards are more consistent

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Remember that excess gains/losses are compounded every year. Even if a Level 5 investor only does a few % points better than the market annually over long periods of time, their gains will be significantly better than the market.

As an extreme example of probably the best investor ever, Warren Buffet has beaten the S&P 500 by over 10% annually for over 60 years.

• $1 invested with Buffett would have gained 5,000,000 % !!! as opposed to 31,000 % with S&P 500 over this period

Investing is not as easy as it looks. Knowing your own capability and limits will ensure that you get the best results possible for yourself.