Paul Farrell asks investors to be honest with themselves:

“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 today’s uncertain, volatile, insane markets?

Farrell channels Ray Dalio and asks 5 questions that requires investors getting brutally honest with themselves. Find out what’s going on inside your own brain by asking if you are:

1. Accurate? Information tested accurate and truthful
2. Biased? Facts you believe are true but are false
3. Denials? You know the truth, but refuse to accept it
4. Wishful thinking? Unpredictable future, you’re guessing
5. Black swans? Disasters we could plan for, but don’t

Most people are not very enlightened about their own biases and prejudices.  If you want to make better investment decisions, you best figure out how you are undercutting yourself.

Go read the full piece . . .



5-part IQ test to make you a better investor
Paul B. Farrell
MarketWatch, Aug. 10, 2012

Category: Apprenticed Investor, Investing, Psychology

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

9 Responses to “Farrell’s Investor IQ Test”

  1. Frilton Miedman says:

    When it comes to processing information, especially from pundits, I like Mark Hulbert’s logic (also a MarketWatch writer).

    There are three types of advice, – those who intentionally mislead for an agenda, – those who make an honest mistake, – those who get it right.

    I joined this forum after observing BR for a few years, in April 2011 I saved a lot of loss by listening, when BR said he was 70% in cash, I took the advice.

    Other pundits can be all over the map, often creating more confusion than enlightenment.

  2. [...] Farrell’s Investor IQ Test Uh oh, It’s not graded on a curve. [...]

  3. DiggidyDan says:

    I tend to be to abhorrent to risk and not able to have a contingency plan for so called “black swan” events because of my real world position in life as a member of Generation K-Y with a hugely underwater mortgage and no job security. Oftentimes the circumstances in your real life and not the condition of the market dictate different responses that make you miss out or fail in your investment life.

    Two cases in point: I did not invest enough at the 2009 lows when I had a ton of cash I was saving for emergencies for the main point of I did not know whether or not I would get laid off and wanted to keep the majority of my funds liquid. Looking back, had I rolled the dice and put all the cash into what I thought was a crazy low valuation on some of the opportunities I was following on the watchlist, I could’ve made about 400% return. . . but woulda coulda shoulda doesn’t count. At the time I was too concerned with having a safety net in case i got canned, and that was more important.

    Second Case: I didn’t have a plan in place for one of my biggest holdings when disaster struck. The BP oil spill. I had a large position with cost basis of about $52 bucks accumulated pre and during the crash. I did not foresee the BP disaster and did not have a stop in place to mitigate it. Thinking I had gotten some of my holdings cheap during the early stages of the recovery, and the trend would only go up from there. . . Do NOT fall into this trap of not thinking the worst could happen at any time. . . It did, and now I am stuck as a “long term investor” underwater in this stock. For the record, I didn’t panic and sell at the low when people erroneously assumed that the stock would go to zero. I still hold those shares and recently bought more for the divy yield when it was about 35, so I am getting cash flow back from it, but not closing out the position quickly when the disaster struck still hurts.

  4. bear_in_mind says:

    Farrell’s points are well-taken, but one has to acknowledge that for Joe and Jane Public, it’s hard-as-heck to trust this stock market. Questions #1, 2 and 4 point as much to the asymmetrical nature of financial market information as it does to individual investors and there’s SO MANY indicators pointing to rampant lies, cheating and fraud by the very industry you’re expected to entrust with your hard-earned cash.That said, avoiding all risk is irrational and means losing precious time to grow your assets, so it’s a matter of striking a risk/reward balance.

    Like DiggityDan, I have some pain from investing (i.e. the DotCom crash) that I’ll never forget. But that experience helped me understand the importance of capital preservation and I’ve become a much, much better thinker about investing (thanks in part to you, Barry) and long-term financial planning.

    I now have a list of companies and stocks to purchase if and/or when we experience a Black Swan event, accompanied by a list of desirable companies leading the market today. Some are the same tickers, but over-valued today (IMHO) and will make great long-term additions when the price is right. I think the key is to keep learning, take your losses and lumps early, and focus on investing rather than trading.

  5. contrabandista13 says:

    Investing and trading, is just like Backgammon….. I spend 2 to 3 hours a day on the board just to stay sharp….. It incorporates all the questions above and it also incorporates the doubling cube. You win some, you loose some…. Just size your bets to correlated to “defined” probabilities…. It’s all about “the cube”….

  6. Iamthe50percent says:

    I also was invested in BP (for the dividend) when the spill occurred. At a certain point, I had lost so much that I had to take the loss or double down. I doubled down. I use the gambling term because it was a pure gamble. Turned out that that was the bottom, the capitulation point. I would up making about 20% overall and goy out, mainly because BP had suspended the dividend. Dumb luck. I’m in Royal Dutch Shell now, a little less dividend but less volatile. BP seems to keep getting into trouble. OTOH, could the spill be considered a black swan?

    Wishful thinking? Guilty. Guilty and I throw myself on the mercy of the court (market has no mercy).

  7. streeteye says:

    To win, you must understand the game, you must understand the players, and above all you must understand yourself.

  8. SanDiegoSam says:

    This is a tough one in this market. So much is being driven by macro factors, that it seems fundamentals are almost irrelevant. This makes it very difficult for an individual investor to get accurate, non-biased data.

  9. Disinfectant says:

    No doubt these are great questions to ask yourself, but of course they CAN NOT be satisfactorily dealt with by most investors. The Dunning-Kruger effect explains why:

    “The Dunning–Kruger effect is a cognitive bias in which unskilled individuals suffer from illusory superiority, mistakenly rating their ability much higher than average. This bias is attributed to a metacognitive inability of the unskilled to recognize their mistakes.” (Source: Wikipedia)