Investment U Pop Quiz: What’s Your IU IQ?

By Dr. Steve Sjuggerud, President, Investment U
Monday, May 16, 2005: Issue #437

So, you’ve been reading the Investment U e-Letter for a while now. Your confidence as an investor is growing every day. That’s great!

But how much investment knowledge 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.)

Investment U Pop Quiz (5 questions):

1. True or False: While India has better infrastructure in place, China’s still a better long-term investment.

2. The main reason Steve Sjuggerud recommends gold coins is:

a) They provide “financial catastrophe insurance.”
b) They’re hated as an asset.
c) They’re cheap.
d) They can be easily stored.

3. Which of the following is NOT one of Steve’s “12 Timeless Rules of Investing”?

a) Bear markets begin in good times. Bull markets begin in bad times.
b) Investing in what’s popular never ends up making you any money. Buy an investment when it has few friends.
c) Always run in the middle of the pack: Favor investments that are in favor with the main stream to avoid big losers.
d) Cut your losers, let your winners ride.

4. Why does Steve generally recommend a 25% trailing stop for stocks?

a) Just because it lets you capture some nice upside while avoiding catastrophic losses.
b) Because 25% has been scientifically proven to be the most effective number.
c) Steve doesn’t recommend 25% trailing stops; he recommends a floating stop of between 5-50%.
d) Because that’s the number Warren Buffett uses, and if it’s good enough for Warren

5. Benoit Mandelbrot is best known for his idea that:

a) The markets follow normal patterns, and we can maximize gains by recognizing them.
b) Normal markets are the ones to avoid – look for the unusual in the markets and you’ll find the profits.
c) There is no normal in the markets and everything you’ve heard about investing from the mainstream is wrong.
d) To be a great trader, one must understand the ways of the masters.

How does your investment knowledge stack up? Check your answers below

Answers:

1. False: China’s lack of infrastructure makes it less attractive for investors in the long term. India, by comparison, enjoys not only superior infrastructure, but also established democratic processes, the rule of law and freedom of the press. All of these provide a stable platform for long-term growth when coupled with India’s burgeoning markets. For more on the China/India comparison, read # 433 – Investment Opportunities in India: Why Go With India Over China: Part 1, and Issue # 434: India’s Economy: Why Go With India Over China – Part 2.

2. C: Steve recommends gold coins for a lot of reasons, but the main one is their value right now. Gold coins like his favored St.-Gaudens are still selling at low levels, and gold is as cheap now as it was in the mid-1970s – when it became legal for U.S. investors to own gold again. For more information, read # 427 – How To Buy Gold Coins: Own fantastic 100-year-old “Brilliant Uncirculated” Gold Coinsat 5% or Less Over Melt Value

3. C: Investing with the crowd is one of the best ways to lose your shirt. In fact, one of the three criteria Steve has for any good investment is this: It has to be “hated” by the Wall Street crowd. Because only investments that are unpopular represent good values. For more on this topic, read # 419 – Investing in 2005: Biotech Stock Predictions, Gold Coin Investments, and Hot Energy Stocks

4. A: There is no scientific reason behind Steve’s general preference for a 25% trailing stop. In fact, you can use whatever percent trailing stop you want. It’s just that 25% has been shown through practical experience to give stocks enough room to run, while ensuring you avoid major losses. Read more on trailing stops in the following issues:

# 426 – Trailing Stops Tested: Do Trailing Stops Really Work?
# 389 – Trailing Stops – How I Track Them And How You Should, Too

5. C: Mandelbrot is a world-class mathematician who crunched a century’s worth of stock market data only to conclude that everything the academics and their Wall Street devotees believe about the markets is hogwash. For more, read # 413 – Everything You Learned About Investing Is Wrong.

Today’s Investment U Cribsheet

Your Investment U Pop Quiz Score: Here’s our unofficial scoring system for today’s quiz, based on the number of answers you got 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.

Good investing,

Steve

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