Benjamin Graham — Warren Buffett's mentor — wrote that knowing the category of investor one fit into was of vital significance.
It's important to have a realistic picture of what kind of investor one is, and how much intelligent effort one can devote to one's investments.
Benjamin Graham — the founder of Value Investing and Warren Buffett's mentor — notably wrote:
"No great harm comes from some uncertainty of viewpoint regarding a single security, because such cases are exceptional and not a great deal is at stake in the matter. But the investor’s choice as between the defensive or the aggressive status is of major consequence to him, and he should not allow himself to be confused or compromised in this basic decision."
The first type of investor Graham described was one who was unable to devote a great deal of time or mental effort to his investments.
"We have made a basic distinction between two kinds of investors to whom this book was addressed—the “defensive” and the “enterprising.” The defensive (or passive) investor will place his chief emphasis on the avoidance of serious mistakes or losses. His second aim will be freedom from effort, annoyance, and the need for making frequent decisions."
Graham described the second category of investors as those who had the time, willingness and aptitude required to build carefully customized portfolios.
"The determining trait of the enterprising (or active, or aggressive) investor is his willingness to devote time and care to the selection of securities that are both sound and more attractive than the average. Over many decades an enterprising investor of this sort could expect a worthwhile reward for his extra skill and effort, in the form of a better average return than that realized by the passive investor."
Graham also explained that the task of the Enterprising investor was one of individual selection; while conversely, that of the Defensive investor was one of individual exclusion.
For professional investors, Graham described various special situations or "workouts". Most of Graham's famous students such as Warren Buffett and Bill Ruane would fall in this last category.
But Graham also wrote:
"The exploitation of special situations is a technical branch of investment which requires a somewhat unusual mentality and equipment. Probably only a small percentage of our enterprising investors are likely to engage in it..."
For Defensive and Enterprising investors, Graham gave very specific stock selection and diversification requirements.