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Are you a defensive or an aggressive investor?

Rebecca Burn-Callander, author of The Daily Telegraph Guide to Investing, discusses the different attitudes to investing over the years.

It’s funny how so many of the terms used to describe moving money around would be equally at home on the battlefield. Seventy years ago, Benjamin Graham, one of the “fathers of value investing” and the man that billionaire Warren Buffet credits for teaching him to become a superstar trader, came up with definitions for “aggressive” and “defensive” investors – definitions that are still popular today.

He said those who analyse companies and markets in order to buy shares in those with the highest growth potential were aggressive. Whereas defensive investors invest less time into stock picking, instead buying shares from household names that have demonstrated consistently strong financial performance. This was less about appetite for risk, but about experience and the amount of time spent on the process of picking winners.

In case you identify with either of these beasts, here is a quick overview of Graham’s criteria for executing these methods the right way. Defensive investors should not buy shares in companies with revenues less than $100m for big industry or $50m for utilities, he said. These sums seem paltry in this era of multi-billion-dollar revenues so may require some tweaking. According to Bank of England calculations, a pound in 1950 is worth £22.50 today, when adjusted for inflation and other considerations but even £2.25bn and £1.12bn, respectively, now appear too small. Turnover in the tens of billions could be a better rule of thumb.

These companies should be in a strong financial position, posting profits for the last five years. They should have a price-to-earnings ratio of no more than 15, which refers to the price of the share versus the amount that share has earned that year.

As for what kind of shares to buy, you want to stick to companies that provide the basics – products and services that people will need in good times and bad. Traders often cite drugs, defence and tobacco as among the perennial performers, although tobacco is getting riskier as young people continue to kick the habit. A defensive portfolio is usually recommended for less experienced investors.

Aggressive investors can pick from a wider array of stocks, but assets should still outweigh liabilities, and there should be some dividend payments, according to Graham. Aggressive traders should look for unpopular established companies, he said, which may be underpriced, and those that have a share price that is equal to or less than its working capital.

You need a strong stomach to be an aggressive investor as these stocks typically experience significant fluctuations. You don’t want to be easily spooked and get out at the bottom of the market. These high risk/high reward companies are typically young and ambitious. It can take a lot of careful research to find them. Once they become City darlings, and hit the headlines, you may have already missed the boat on the really big returns. Technology is an industry where many aggressive investors make their play – fast moving and highly competitive, the winners win big and the losers lose their shirts.

Of course, these aren’t the only portfolio flavours out there: you could be an income investor, with a big pot that you want to invest in order to top up your income or pension using the interest.

Then there are the speculators: the gamblers of the investing world. These traders dream of being the James Marshall of the modern age. Marshall discovered gold at Sutter’s Mill in California back in the mid-1800s creating the legendary gold rush. But, it is generally accepted that the portfolio of the truly canny investor is a hybrid of all four styles – with speculation making up the smallest proportion of the whole.