Take this Quiz and find out if you have the character to be a successful trader

One of the most interesting questions in stock investments is what use do years of learning provide if most fund managers and portfolio managers under-perform the market? Maybe the "models" don't work?

Fortunately, empirical tests show time and time again that in the long-run, "models" do work and most variances in performance are due to a simple irrational factor - human character.

As humans we aren't consistent; we involve gut feelings; we hesitate; we prefer to make poor decisions rather than good decisions that will present us badly in public or even in our own eyes.

We simply aren't machines.

Below is a small quiz. A machine would achieve top scores in it. How about you?

Question #1:
A friend tells you that he made 90% on a certain stock from the beginning of the year! Chances are:
a) If the stock achieved 90% so fast then it will most likely depreciate, so you will not buy it.
b) If a stock appreciated by 90% from the beginning of the year then it is suspicious, and you will not buy it.
c) The stock's sharp rise is completely irrelevant, and you will disregard it in your decision whether to invest or not in this stock.
d) You will buy the stock if your friend promises to alert you when he sells his shares.

Show Answer

The correct answer is (c). In reality, most people will find it hard to enter a stock that has already rallied throughout the year, especially when their friends have already profited on it.

 

Question #2:
You want to cut back your portfolio because you are in need for some cash. You have 5 stocks in your portfolio: Stock A with 100% profit; Stock B with 25% profit; Stock C with 0% profit/loss. Stock D with 25% loss; Stock E with 75% loss. You are most likely to sell:
a) Stock A because you can now tell your friends that you cashed 100% profit on the stock.
b) Stock B… before it goes down.
c) Stock C… 0% profit/loss means it’s as if you never bought it.
d) Stock D or E… because you are “angry on their misbehavior, and they ruin the mood every time you look at your portfolio table.
e) The stock's performance is completely irrelevant, and you will disregard it in your decision which stock in your portfolio to sell.

Show Answer

The correct answer is (e). In reality, most people tend to sell their profitable stocks early, and wait for their losing stocks to appreciate towards the buying price so that they can sell them with no loss or a marginal loss. It simply makes them feel better.

 

Question #3:
You sold a stock and made a 70% return, but the stock continued to climb another 50%. You now got good information about the company. What will you do?
a) After you sold it, you mentally can't possibly bring yourself to buy it at a 50% higher price.
b) You will buy the stock again
c) You will wait for the stock to decline a bit so the price will not be so far from your selling price, and then buy it.
d) You will not be fooled by the rise in the stock's price. Its price should be around the price in which you sold it.

Show Answer

The correct answer is (b). In reality, most people will find it hard to invest in a stock that appreciated significantly beyond the price at which they sold it. They will normally hope and wait for a downward correction so that they can buy into the stock again without any bad feeling.

 

Question #4:
In order to achieve substantial returns on a stock investment, it is important to be rational..
a) Imaginative thought is much more important than rational thinking when investing in stocks.
b) Understanding current market conditions helps determine the future.
c) The stock market is not rational, and therefore being rational is irrelevant.
d) All the answers are correct.

Show Answer

The correct answer is (a). The stock market is a market of the future, not the present. There is no such thing as a "rational forecast" because the rationale is based on the past or present. Profiting from stocks requires imagination and vision beyond what is known, expected, or already priced in the stock.

 

Question #5:
One of the best ways to choose stocks in a bull market is to find the stocks that haven’t appreciated yet.
a) True.
b) Un-true. More likely these stocks did not appreciate due to a particular reason.
c) Stocks that appreciated so far are more likely to continue appreciating.
d) Un-true. The stock’s return to-date has nothing to do with its selection into or out of the portfolio.

Show Answer

The correct answer is (d). In reality, most people will find it hard to purchase a stock that has already rallied throughout the year, or stocks that they have sold at a loss in the past.

 

Question #6:
What is easier – to buy stocks, or to sell stocks?
a) To buy stocks
b) Makes no difference
c) To sell stocks
d) Depending on the situation

Show Answer

The correct answer is (a). In reality, most people will find great excitement in making a decision to buy or sell a new stock, but will find it very hard to sell a stock due to the enormous emotional input that they have put into that stock throughout their holding period.

 

Question #7:
You bought a stock and immediately after it plunged by 50%. What is the best thing to do?
a) Buy more stocks so the average price at which you bought the stock will be much lower.
b) To sell the stocks and avoid additional losses.
c) To ask yourself whether you would have bought this stock today and act accordingly.
d) To wait until it rises and then sell it, because what comes down, eventually comes up again.

Show Answer

The correct answer is (c). Most people find it hard to take immediate action because they need time to digest major decisions. The average person will either wait until the stock rises to their buying price and then sell it quickly, or buy more shares of the stock so their average buy price drops towards the stock’s current price. By following the "dollar cost averaging" method, the investor tries to make the loss on the stock "seem" smaller and easier to gain back.

 

Not happy from your results? It's only human. That is why it's time you upgraded your account to a premium one and get unbiased daily alerts by a supercomputer! Subscribe now!