Classifying types of investors

I usually a non-stereotype person but over the years, I note that regardless of their locations and underlying businesses, investors tend to fall into one of three categories:-

Firstly, disciples of Ricardo – the law of comparative advantage as first describe by Ricardo, guarantees an optimal distribution of labour and capital between countries and thus a very good growth rate for profits. This is true as long as comparative advantages have not been fully exploited. And, of course, the one part of the world where Ricardo’s law of comparative advantages is just beginning to have an impact is, of course, emerging market. Thus, ‘Ricardian investors’ tend to be very biased today towards emerging markets.

Secondly, disciples of Schumpeter – For Shumpeterians, the source of high returns can be found in the influence of the entrepreneur/inventor and breakthroughs in technology. Such investors tend to favour knowledge-based companies and usually carry overweight position in tech stocks, healthcare stocks and other growth stocks.

Thirdly, disciples of Malthus. For such investors, commodities cannot be in short supply over time given the growth of the world’s population and of overall global incomes. Commodity prices will thus have to rise given that we are confronting a world with too many Chinese/Indians/Asians and not enough oil/copper/gold/iron-ore etc. For Malthusians, the solution is thus simple – load up the commodities or commodities producers or load up on gold and stay outright bearish of most asset classes. Most of the perma-bears as opposed to cyclical bears, I have met over the years tend to be disciples of Malthus.

In my opinion, to reach a diversified position, one can build a portfolio on Ricardo and Malthus on the assumption that rising living standards in emerging markets will lead to a structural rise in prices of many commodities. And while history does not support such a view, it still makes plenty of logical sense.

Alternatively, to capture the returns available in the ‘volume’ growth part of the capitalistic system, rather than the ‘price’ part, one can build a portfolio focused on Ricardo and Schumpeter.