The Investment U E-Letter
Friday, May 23, 2003
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Pop Quiz!
By Dr. Steve Sjuggerud
President, Investment U
Today it's time again to take a step back and find out how much we're learning as investors. It's important every now and then to measure our progress… and find out what lessons we're taking to heart. So take this quick Pop Quiz and find out how much you really know… (The answers and explanations are at the bottom.)
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Pop Quiz Question #1: How Pricey Stocks Can Keep Rising (from E-Letter #239) If fundamentals are irrelevant to stock price action in the short run (enabling already "pricey" stocks to continue running), what are the two things that do influence prices: A. Pro-forma earnings and earnings per share
B. The Fed's short-term interest rates and consumer confidence
C. The perception of risk and the prevailing trend
D. Price-to-sales ratio and dividends ---------
Pop Quiz Question #2: Who's the Best Analyst? (From E-Letter #238) According to The Wall Street Journal's "Best on the Street" survey, out of 77 brokerage firms and 1,400 analysts competing, this group's recommendations were rated as the best.
A. Street & Smith's
B. Standard & Poor's
C. Morgan Stanley
D. Kinder Morgan
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Pop Quiz Question #3: The "Big Lie" That's Threatening Your Retirement (from E-Letter #228)
Professional analysts agree that stocks returned about 10% annualized over the 20th century. And they also agree that, when you account for effects of inflation, the annualized return on stocks was 6.7%. But what are the two components that make up this "real" 6.7% return?
A. Interest payments and compounding
B. Dividends and bonuses
C. Dividends and interest rates
D. Dividends and capital gains
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Pop Quiz Question #4: Pulling the Trigger (from E-Letter #209)
Many investors never realize significant investment profits because they worry so much that they never actually "pull the trigger" (i.e. make an investment). All of the following are examples of how you can reduce worry and "pull the trigger" except one. Which one?
A. Make a number of smaller investments instead of a few larger ones.
B. Recognize that it's okay to take a loss.
C. Remove some of your market stress by taking less risk.
D. Commit to a lower stress lifestyle.
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Pop Quiz Question #5: 2031: When the Nasdaq Will Finally Be a Good Buy (from E-Letter #207)
After crunching more numbers than anyone else I know, I've found that a reasonable fair value for stocks is somewhere around 15 times earnings, 2 times book value, and one times sales. This is about the average value of stocks throughout financial history (and it's actually a little generous). Based on today's 100 largest U.S.-based companies on the Nasdaq, what is the median price-to-earnings ratio?
A. The median price-to-earnings ratio on the Nasdaq is 33.
B. The median price-to-earnings ratio on the Nasdaq is 3.8.
C. The median price-to-earnings ratio on the Nasdaq is 0.33.
D. The median price-to-earnings ratio on the Nasdaq is -3.38.
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Answer #1: C - In the short term, the perception of risk and the prevailing trend drive stock prices. That's why a company like Yahoo, with its extreme valuation, can continue to climb higher. But in the long term, fundamentals again return to prominence. Read IU E-Letter #239. --------- Answer #2: B - Standard & Poor's analysts were recognized as providing the best recommendations. And not surprisingly, has no brokerage/investment-banking conflicts of interest with its stock research. It just does analysis and sells it. Read IU E-Letter #238.
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Answer #3: D. - Dividends and capital gains. So while it's true that stocks returned roughly 10% over the 20th Century, the actual breakdown went this way: 4.6% Dividends + 2.1% Capital Gains + 3.2% Inflation = about 10%. But that's still no guarantee of 10% returns in the future. Read IU E-Letter #228.
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Answer #4: A - Make a number of smaller investments instead of a few larger ones. While reducing your position size and not putting all of your eggs in one basket is a significant part of a disciplined investment strategy, this in an of itself will not help to reduce worry. The other three answers in this question are all realities of investing that once accepted will help you to make investing a less emotional affair. In fact, investing should be emotionless. Read IU E-Letter #209.
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Answer #5: A - The median price-to-earnings value on the Nasdaq is 33 - more than double the historical average. In addition, the median price-to-book value on the Nasdaq is 3.8 and the median price-to-sales ratio is 3.7. All of these are still considerably over their historical averages. To learn when they could return, given a flat Nasdaq, read IU E-Letter #207.
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So… how did you do? I hope that today's Pop Quiz shows you how much ground we've covered just in the last few E-Letters. Please take a moment to visit the Investment U Message Board, and share your results with your fellow IU'ers. And be sure to let us know what you might like to learn about in future issues of the Investment U E-Letter. Good Investing, Steve
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