Investment Quiz

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The Five Rules of Profitable Investing Quiz

By The Investment U Research Team
Monday, December 5, 2005: Issue #492

In the past couple of months, we’ve looked at a long, sturdy list of proven investment strategies. These timeless money-management rules have turned disciplined investors into millionaires. And making them a habit here at Investment U can clear your path to do the same.

Today, let’s take a moment to explore the five rules of profitable investing and the most important, fundamental principles for building wealth.

Answer these five questions before you spend, save or invest another dollar. When you’re finished taking the quiz, check your answers at the bottom.

Good luck!

1. What are the three components of “triple compounding”?

A) Regular investing, leverage and a rising interest rate environment.

B) Inflation, capital gains and an Automatic Investment Plan (AIP).

C) Regular investing, capital appreciation and reinvesting dividends and capital gains.

2. What is Dr. Mark Skousen’s #1 profitable rule in investing?

A) Be a bull in a bull market, and a bear in a bear market.

B) Build your stock positions 100 shares at time.

C) To capture growth opportunities, target the smallest companies on the Nasdaq.

3. Which of the following is a principle of John Templeton’s five-step formula for financial independence?

A) Hold stocks for six weeks or less.

B) Minimize exposure to foreign markets.

C) Take calculated risks.

4. The late Peter Drucker, the world’s #1 financial guru, put forth ideas that have helped many investors become better money managers, businessmen and citizens. What was one of his guiding principles in investing?

A) Invest in aluminum and copper on an annual basis.

B) Spend less, save and invest more.

C) Maintain your U.S. equity holdings at 12% of your portfolio’s value.

5. Debt has many functions, and as we know, some are better than others. Debt is most profitable when

A) Used for leverage.

B) Interest rates are high.

C) Interest rates are low.

Answers to the Five Rules of Profitable Investing Quiz

1. – (C) Triple compounding results from regular investing, capital appreciation and reinvesting dividends and capital gains. When you regularly invest it in a good mutual fund or two, your account can become profitable and grow very fast for three reasons: First, you are adding to your account every month. Second, if you invest in growth mutual funds, your account’s NAV (net asset value) is likely to grow over time. And third, all dividends and distributions are automatically reinvested.

You can start with as little as $100 a month, or as much as $10,000 a month. It’s completely up to you. For details, see IU # 467: Powerful Financial Planning Tools.

2. – (A) Mark Skousen’s #1 Rule in investing: Be a bull in a bull market, and a bear in a bear market. IU # 474 explains this concept: Investing Guide: The First Investment Ruleand How To Put It To Work. However, in sum: Most bull markets (and bear markets) last several years, so there’s plenty of time to get aboard. Answer the question: “Where are the bull markets – and bear markets – today?” And then act on it.

3. – (C) Take calculated risks. John Templeton started off by taking significant risks in his business and investments. In 1939, he borrowed $10,000 from his boss to bet on 100 stocks listed on the NYSE selling for under a buck. A high percentage of these companies were close to bankruptcy, but Templeton reasoned that they would recover during a wartime economy. (It pays to have a correct “macro” view of the world.) In four years, he sold all the stocks, paid off the debt, and pocketed $40,000 in profit. He was on his way to success. For all five steps in his formula for profitable investing, read IU # 482: Sir John Templeton’s 5-Step Strategy For Financial Success: How to Build Wealth With Risks, Bargains and Tax Deferral.

4. – (B) Spend less, save and invest more. Peter Drucker disliked big spenders, heavy borrowers and governments that couldn’t balance budgets. The smart investor always lives within his means, and uses his savings productively – either in expanding his business, or investing in other people’s successful businesses (i.e., buying quality stocks). Read on for Peter Drucker’s two other invaluable lessons.

5. Both A & B! In terms of leverage, properly managed debt can be highly rewarding and can pave the road to financial independence. Financing real estate is a good example of using leverage, but in business as well, borrowing money or issuing bonds is a leveraged and fast way to succeed in the corporate world. Most public companies have some form of debt, mostly to their advantage.

As for high interest rates, you have to remember which side of the equation you’re looking at – high-interest debt may be a burden on your cash flow if you’re the borrower. Lenders love high interest rates, and enjoy substantial profits from them. Check out the recent Investment U piece on consumer and business debt: How To Manage Debtand Make Yourself Extremely Rich.

How did you do on today’s Five Rules of Profitable Investing quiz?

5 – Next year’s “Benny” Nominee
4 – Standard & Poor’s New Star Analyst
3 – Berkshire Hathaway Intern
2 – Berkshire Hathaway Shareholder
1 – You’ve got a long way to go, but might make a great guest analyst for MSNBC.

Good trading,

The Investment U Team