Investment U Pop Quiz: What’s Your IU IQ?
By Dr. Steve Sjuggerud, Advisory Panelist, Investment U
Tuesday, January 18, 2005: Issue #404
So, you’ve been reading the Investment U for a while now. Your confidence as an investor is growing every day.
But how much have you really absorbed from these e-letters? Here’s a quick way to find out – while having some fun in the process. (Answers are at the bottom.)
1. According to Robert Haugen, what’s one way to generate really big returns?
A. By taking a risk, investing in tech stocks and other growth companies.
B. By putting more money at stake – the bigger the risk, the bigger the return.
C. Invest “ugly” – buy “boring” businesses at cheap values.
D. Invest in high-interest junk bonds.
2. Which of the following is one of the biggest mistakes an investor can make, according to Dr. Van Tharp?
A. Cutting your losses early in an investment.
B. Having an exit strategy in place when you enter a position.
C. Allowing emotions to guide your investments.
D. Practicing position sizing.
3. Which of the following is true about investing in timber?
A. The price of timber consistently beats inflation.
B. Timber returns have never beaten stocks.
C. Timber is correlated to stocks.
D. Timberland is relatively expensive.
4. Which of the following is not a great way to research your investments?
A. Rely on free stuff at the library.
B. Investment software like Excel’s XLQ companion is inexpensive and easy to use.
C. Websites like Yahoo! Finance and MSN Money feature insider trades, institutional ownership and financial results for just about every stock out there.
D. Rely on the recommendations of friends and acquaintances who have “been there” and learned from experience.
5. What do I look for when making a “buy”?
A. A popular investment.
B. A stock that’s expensive but promising.
C. An unpopular investment poised to jump.
D. A stock in a confirmed downtrend, so I can ride the uptrend when it starts.
Answers:
Answer #1: C – According to Haugen’s book, The New Finance, buying less risky “value” stocks (defined as stocks with the lowest price-to-book ratios) actually beats buying risky “growth” stocks over the long run. While other investors are stretching outside their comfort zones, making risky investments, investments like Treasury bonds may be a safer – and more profitable – investment. For more, check out Investment U #388 – How to Beat the Markets by Risking LESS.
Answer #2: C – Allowing your emotions to cloud your investments is one of the costliest mistakes an investor can make. Falling in love with an investment can lead to “Oh, but it’s a promising company the stock has to pick up!” The next thing you know, you’re broke – and heartbroken. Refresh your memory by reading Investment U #329 – Mastering Investing: How Not to Lose.
Answer #3: A – Timber consistently beats inflation! Timber is thought of as a good inflation hedge, and the numbers show that to be true. According to legendary investor Jeremy Grantham, over the last century, timber prices have risen at 3.3% above the rate of inflation. Add 5% a year in income, and you’ve got an asset that has returned double digits, competing with stocks over the long run. For more, read Investment U #410 – Timberland Better than Stocks?
Answer #4: D – Although your friends and coworkers may have “been there” before, investment research is perhaps best left to the experts. Do you want to rely on professionals who do this for a living? Or do you want to trust the nice lady at the deli? Your friends can tell you all about their investments, but at the end of the day, you are investing your money. For more information, read Investment U #313 – How to Get $100,000 Worth of Research for a Year.
Answer #5: C – Buying investments everyone hates can be a great way to find bargains poised to soar. This answer speaks to all three of Steve’s “buy” criteria: extraordinary value, investor apathy and the glimmer of an uptrend. Check out Investment U #334 – Three Simple Secrets for Triple-Digit Returns.
Scoring, number of answers correct:
5: Investment Senior – You’re the big man (or woman) on campus
4: Investment Junior – You’re nearly ready for the real world
3: Investment Sophomore – You’re a lot of fun to talk to at parties
2: Investment Freshman – Let the hazing begin!
0-1: Dear Applicant – We thank you for your interest, but we regret to inform you
I hope this was a fun, enjoyable challenge for you.
Good investing,
Steve
Related Investment U Articles:
- Timber Investing: An Inflation Play a Cut Above Gold…
- Investing in Alternative Assets
- Is the Media Gaming You?
- Timberland Stocks: Why It’s Time to Knock on Wood for Profits… Literally
- The End-of-the-World Portfolio… Is it Too Early to Have One?
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