If you can answer
the following questions correctly, then you are very aware about
the human behavior of buying and selling stocks…
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.
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.
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.
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.
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.
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
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.
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.