8/13/12

5-part IQ test to make you a better investor - MarketWatch

Paul B. Farrell

Aug. 10, 2012, 12:03 a.m. EDT

5-part IQ test to make you a better investor

Commentary: Unlock the secret path to financial success
By Paul B. Farrell, MarketWatch

ARROYO GRANDE, Calif. (MarketWatch) How successful are you as an investor? You a winner? If not, why not? Are you too smart? Maybe too dumb? Too irrational? Uninformed? Deck stacked against you? Too manipulated to invest successfully in todays uncertain, volatile, insane markets?
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Seriously, are you really good at finding and analyzing the right information in todays overdose of market data ... unstable global economies ... emerging markets ... death of equities ... new normal ... fiscal cliffs ... political gridlock ... trading algorithm glitches ... billionaires versus middle class ... austerity ... no-growth economics ... big oil lobbying ... Fed stimulus ... social media IPOs ... doomsday cycle ... 2012 elections ... Euro default ... Chinas apocalypse ... runaway population ... global commodities wars ... Head spinning? Lets slow it down. Lets start with a simple 5-Part IQ Test for investors. You grade yourself. Then decide. Armed with a new sense of self-awareness, you focus, get centered, pick the right strategy, a new one thatll work best for you. Power, confidence, self-knowledge creates winners. The best investing strategies are simple, timeless, obvious, transparent ... and too often ignored. Yes, ignored. Why? Because most investors have trouble making decisions. They rely on the random flow of breaking news, biases, weak data and so-called experts.

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Unfortunately, in processing an overwhelming tidal wave, the investors brain has reprogrammed itself to process high volumes of short-term information that significantly discounts long-term data and overrides timeless principles. And yet the best investment advice still is incredibly simple and obvious. But because this process forces us to ignore breaking news and take personal responsibility, many investors freeze, cant decide, vacillate and lose their self-confidence. What if youre in a double-bind, indecisive, dithering? Heres every investors best advice, something the Buddha said 2,500 years ago: Believe nothing, no matter where you read it or who said it, not even if I said it, unless it agrees with your own reason and your own common sense. If investors took Buddhas advice, Wall Street would be out of business, and youd be in control! But be careful, if you do take this advice, youll fall into a classic double-bind! Yes, youll know you can never trust another so-called expert. But how do you know if you know enough to trust yourself? Years ago I discussed this esoteric field of investing metaphysics with financial adviser Paul Merriman and came away with a sudden awareness that the investors problem is not out there. Its not too much
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5-part IQ test to make you a better investor - MarketWatch

information or too little of whats going on out there on Wall Street, in the markets or economies across the world. No, investors biggest problem is whats going on inside their own brain. Period. So heres a short fivepart quiz we designed to help you find out how to sort that out for yourself and make better investment decisions: #1. Accurate? Information tested accurate and truthful (20 points) Wed all love to have tomorrows newspaper today. Unfortunately, investors are historians not futurists. And were overloaded. Even with the best data available, for example the data in most fund profiles, youre dealing with 10,000 funds, each with 100 data points that are actually old news, usually 3-to-6 months old, some a year old. So you oscillate between a false sense of being well-informed, and insecurity about the truth. Give yourself 20 points if you believe you get the honest-to-gods hard facts here. #2. Biased? Facts you believe are true but are false (20 points) Behavioral finance guru Richard Thaler says Wall Street needs investors who are irrational, woefully uninformed, endowed with strange preferences, or for some other reason willing to hold overpriced assets. The games rigged and the house always wins. Wall Streets army of behavioral economists, securities analysts, cable talking heads, industry pundits and ad execs all know your brain tunes into upbeat positive news, screens out contrary data. They easily manipulate your internal belief system. In our desire for clarity about the future, we tune into what reinforces preexisting beliefs. We believe that listening to MSNBC or FoxNews, reading one more newspaper, or researching one more stock, youll discover tomorrows truth. Max of 20 more points if youre certain you get the whole truth. #3. Denials? You know the truth, but refuse to accept it (20 points) Our minds are masters at denying the truth, even when its staring us in the face. Nouriel Roubini sees this phenomenon a White Swan in Crisis Economics. In fact, financial crises actually occur in predictable patterns that masses of investors still deny and ignore. For example, for four years leading up to the 2008 Wall Street crash, we reported on dozens of credible warnings. We questioned denials by the Treasury secretary and Fed chairman. The need to be right leads us to deny contrary data, like P/E ratios. We con ourselves with clichs: This time its different, a new economy. Sorry, but you cannot trust either optimism or pessimism, not yours, not theirs, nor mine. Even when youre certain youre right, you may be dead wrong, yet unable to let go of a bad idea. Max 20 points. #4. Wishful thinking? Unpredictable future, youre guessing (20 points) In your mind, you know you really cant know much about tomorrow. Theres a reason financial insiders insert a warning in their research: Past performance cannot predict future results. Yes, you tune it out, theyre protected. Youre in fantasy land with a lotto ticket. Every day the press and media blabbers on with hundreds of market gurus, economists, CEOs, and advertisements galore. We counted them one day, over a hundred predictions, contradictions, oxmorons, dilemmas, paradoxes, a relentless torrent of conflicting data about future unknowns, unpredictable, speculations and guesstimates. We obsess, anxiously trying to figure out what you can never really know, until after the fact. Another 20-point max: But only if you have a solid track record predicting the future. #5. Black swans? Disasters we could plan for, but dont (20 points) Black swans are unknown future events. There are so many data points, macroeconomic possibilities
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5-part IQ test to make you a better investor - MarketWatch

and uncertain risks beyond our human comprehension. And yes, experts use sophisticated gametheory strategies to predict probabilities of unpredictable events. But too many unknowns slip through the human mind, catch us by surprise. Nassim Taleb, an options trader, mathematics professor and author of Fooled By Randomness, says black swans are rare events with three defining characteristics: They are improbable, unpredictable and will have massive consequences. And afterwards experts will tell us all the reasons the events were predictable, not random. Yes, we may never see these historic turning points until after the fact, when its too late to prepare. But all too often the risks of sudden unexpected events, like market crashes, natural disasters, currency collapses, pandemics, terrorist attacks and nuclear wars are predictable but discounted as too costly to prepared for. Such as events like the 2012 Knight Capital HFT programming glitch, Wall Streets 2008 crash, hundred-year floods and the next Big Oil spill. The best and brightest can predict but chose instead to take the risks, hope nothing happens and get richer. Max out with another 20 points here. Whats your Investors I.Q. Score? Will you succeed in 2013? Folks, the biggest decision every investor must make is taking total responsibility for their investment strategy and performance. Most waffle. But youll never mature by default, by following the experts. You must take charge of the good, the bad and the ugly in this increasingly dangerous world. Its your money, your retirement, and in the end, you, not the gurus you follow, are stuck with the gains or losses. Remember the wisdom of Lao Tzu another great investment adviser 5,000 years ago: He who knows others is wise. He who knows himself is enlightened. Which are you? One final warning: If you take this Investors I.Q. Test and get over 50%, youve still got some denial about the world and yourself. Get honest with yourself. Then rework your investment strategy.

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