The Good Investor's MentalITy - Do You Have IT? 123
The Good Investor’s Mentality Quiz has come from experiences gained through the last 15 years of investing and primarily reflects conversations and readings from great investors and thinkers. This is a quiz about great investors, not great traders, which are two different animals. The overarching attributes that seem to make a great investor are the ability to let logic dominate emotion, a focus on understanding knowable factors, a self-awareness of what is unknown or unknowable, and a constant mission to refine and improve their process. Take the quiz and remember that great investing is Read morea mindset, no a skill-set. Unfortunately attitudes are harder to change than knowledge, but just like other great investors, you can put systems and discipline in place to help foster a culture with the “great investor” mindset (hyperlink system and discipline and link to www. Alphatheory. Com/demo). “Success in investing doesn't correlate with I. Q. Once you're above the level of 25. Once you have ordinary intelligence, what you need is the temperament to control the urges that get other people into trouble in investing. ” – Warren Buffett, Legendary Investor“Part of being successful in the markets is being in control of your emotions and making decisions for the right reasons, not the wrong reasons. And the more you can stay in touch with that and what’s going on in your head, then I think the more successful you can be. ” –Steven
- 1.
A blackjack player has 19, takes a hit and gets a 2 for 21. Is the decision to take a hit a:
- A.
Good decision
- B.
Bad decision
Correct Answer
B. Bad decisionExplanation
Bad decision. A blackjack player with 19 has a higher expected return staying than hitting no matter what the dealer is showing. To maximize the long-term expected return of their play they should always stand on 19. (“Any individual decision can be badly thought through, and yet be successful, or exceedingly well thought through, but be unsuccessful, because the recognized possibility of failure in fact occurs. But over time, more thoughtful decision-making will lead to better overall results, and more thoughtful decision-making can be encouraged by evaluating decisions on how well they were made rather than on outcome. “– Robert Rubin, former Treasury Secretary)Rate this question:
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- 2.
You buy a house for $1 million that subsequently declines in value to $500,000. Someone offers you $800,000 for the house. Do you:
- A.
Take the deal
- B.
Pass
Correct Answer
A. Take the dealExplanation
Take the deal. The decrease in value from $1 million to $500,000 is a sunk cost. The question should always be, "if I were investing in this asset forthe first time today, what would I do?" In this situation you would take the deal because you could turn around and buy another house of similar properties for around $500,000 and collect $300,000 in profit. (“What you already have invested in the pot doesn’t matter.” – Doyle Brunson, ten time World Series of Poker Champion / “Never stay in a poker game hoping to get even.” – Doyle Brunson, ten time World Series of Poker Champion)Rate this question:
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- 3.
Two stocks trading at $30 have the same potential upside to $50 and downside to $20, but you have greater confidence in the upside being achieved for Stock One. Assuming all else equal you would:
- A.
Have a greater exposure to Stock One
- B.
Have equal exposure to both assets
Correct Answer
A. Have a greater exposure to Stock OneExplanation
Have a greater exposure in Stock One. The true value of an asset is a combination of the potential upside, potential downside and the probability of each. If one asset has a higher probability of upside then it has a higher risk-adjusted return and should merit a great exposure in the portfolio. (“People don’t need extraordinary insight or intelligence. What they need most is the character to adopt simple rules and stick to them.” – Benjamin Graham, father of Value Investing / “The main reason investors struggle with how to react to bad news is that they really haven’t figured out why they own the stocks they own.” – Bill Nygren, Oakmark Fund)Rate this question:
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- 4.
You should let winners run:
- A.
True
- B.
False
Correct Answer
B. FalseExplanation
As a "winner runs" its position size increases, the potential upside decreases, and the potential downside increases. This equals greater exposure to a lower expected return asset. (“We as a firm are always going to buy too soon and sell too soon. And I’m very at peace with that.” –Seth Klarman , Baupost Group / When asked how he had become so rich? He replied, “I sold too early.” – JP Morgan, famous financier / “The riskiest moment is when you’re right. That’s when you’re in the most trouble, because you tend to overstay the good decisions.” – Peter Bernstein, legendary investor)Rate this question:
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- 5.
The five best ideas in your portfolio from a risk-reward standpoint should be your five largest positions:
- A.
True
- B.
False
Correct Answer
A. TrueExplanation
There is no better way to maximize long-term portfolio expected return than to ensure that the best risk-adjusted return assets are the largest positions in the portfolio. See the Alpha Theory™Monte Carlo simulation that shows Expected Return based position sizing is 40% better than the next best method for creating long-term returns. (“We construct portfolios the way theory says one should, which is different from the way many, if not most, construct their portfolios. We do it on a risk-adjusted rate of return.” – Bill Miller, legendary investor)Rate this question:
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- 6.
The best measure of risk for an asset is:
- A.
Downside potential
- B.
Volatility
Correct Answer
A. Downside potentialExplanation
Downside potential. What is a better measure of risk? How much something moves or how much you can lose? Downside potential is a fundamental manager's gauge of risk and reflects their analysis of an asset. Volatility is simply a proxy for downside potential and is based on a log normal distribution of the market. See the Alpha Theory™ Differentiation from Portfolio Optimization for more details. (“risk is not volatility” – Mario Gabelli, GAMCO Funds, Bloomberg TV Interview – December 3rd, 2008 / “They’re looking for lower volatility, and they are paying a very heavy price for lower volatility: They’re losing performance.” –George Soros , Quantum Fund)Rate this question:
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Current Version
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Mar 21, 2023Quiz Edited by
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Jan 23, 2009Quiz Created by
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