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True / False? Challenge Your Stock Market Knowledge

by Peter Leeds

Read all the past Blog entries here

Test your knowledge - Try to get 10 or more correct!

You may be surprised by some of the answers to these questions.  Keep track of how many you get right, and see your rating at the bottom.
 
 
The best time to invest is when everyone seems to be in agreement:
 
Typically when everyone is thinking the same way, and acting in the same fashion, they all buy the same stocks. This results in the price of those shares being dramatically overvalued, and most people end up paying too much.
 
In general, assuming that the underlying companies are solid (as explained in this video), it is more profitable to invest in asset classes which are out-of-favor, or no one has on their radar. This is why Warren Buffett suggests buying your snow shovels in the summer, and your barbecues in the winter – you will get a much better deal.
 
Therefore, the answer should be:  False.
 
 
People make more money with options than they do with stocks:
 
Options have the capability to produce greater returns than those seen in the underlying shares, but in general investors lose more money trading options than they do by trading stocks. This is because the value of options is partially a factor of time value - options eventually expire worthless if they are not exercised.
 
What this means is that a bad call can cost you 100% (which is true of stocks too, but that risk is much more rare).  Often, options will collapse in value very rapidly, even when the underlying asset is acting as you may have hoped. 
 
Most investors see the potential gains from options, and gravitate towards the asset type, without having a proper understanding of the balance between intrinsic and time value.  As such, many less sophisticated investors get immediately and absolutely wiped out when they try a foray into trading the seemingly lucrative options.
 
Since it is possible to make more money trading options, although most people make less money, we will say that the answer to this statement is both True and False.  Give yourself a check mark for getting this one right, regardless of how you answered the question.
 
Answer:  True and False.
 
 
The more positive sentiment that investors have, the more likely the stock market will increase:
 
Investor sentiment is actually a contrary indicator.  People act on their beliefs, so if everyone thinks that the stock market is going to increase, they typically have invested already.
 
When everyone who wants to buy has done so, the buying demand lets up.  There will typically result in a decline in the involved shares.
 
Thus, the answer should be: False.
 
 
America will default on our debts:
 
American default is an absolute 100% certainty.  Our current debts are absolutely mathematically unpayable.  In fact, it is not even close to being manageable.
 
Every American taxpayer is indebted right now by about $850,000. No one will expect that money to actually be paid by you, leaving the only alternatives being default, or pushing the debt onto younger generations.
 
Part of the problem is that your personal liability amount is not stationary, and continues to grow even as you read this sentence. As a nation, and in fact with most countries all around the world, we spend significantly more than we bring in. The debt can be pushed off, or paid down by taking on more debt, but eventually there will be a judgment day - I would call this the "Default Day."
 
So, will we default on our debts?  True.
 
 
Professional hedge fund investors outperform the overall markets:
 
Sure, some of them do, but on balance the majority of hedge fund traders and professional money managers do not provide returns as high as if they just invested in an index fund in the first place.
 
Unfortunately, the answer is:  False.
 
 
Real estate and stock market investments always increase in value over time:
 
So far, this has been true when looking at a long enough time frame. However, there are short and medium-term time periods where real estate and stock market assets decline in value...  In fact, in each case where real estate or stock market bubbles burst, given enough time they returned to their winning ways. 
 
There is a lot of opportunity for debate about the role in which the declining purchasing power of the dollar actually had on the underlying assets.  For example, has a house doubled in value, when the purchasing power of the dollar has dropped in half?  It would appear the home costs twice as much, but really it hasn't theorhetically increased in comparative "worth."
 
What often looks like an increases in price is actually a result of more currency being required to purchase the same asset.  
 
Keep in mind, anything can happen regardless of what has occurred up until this point. There will come a day when the historical trends no longer hold up... in the short term at least... but given enough time would probably see a resumption of the trend.
 
So, do real estate and stock market investments always increase is value?  For the most part, this is:  True.
 
 
Exchange traded funds directly mirror the asset class which they are trying to replicate:
 
While this may be the intention, there are slight variations (called "slippage") where investors take barely perceptible hits to their asset value. Since many exchange traded funds are actively managed, there are some tiny administrative costs which can come out of the value of the ETF itself.
 
While $100 and physical gold may double in value to $200, often in ETF that tracks the price of gold, such as GLD, may only increase by 97%, rather than the full 100%.  This is all explained in this video by Peter, called, "ETF Death."
 
Thus, the answer is:  False.
 
 
Oil prices are controlled by the supply and demand:
 
As explained in this video, oil prices are based on speculative decissions by traders in London and Manhattan.
 
Supply and demand controls oil prices?  Maybe supply and demand forces partially guides their speculation to a certain degree, but logistics, expectations, and crowded trades are what truly drives prices.  Thus, the answer should be considered:  False.
 
 
If a stock drops 50% in value, it needs to increase 50% to reach it's starting point:
 
If a $1.00 penny stock drops to 50 cents, it would then need to increase by 50 cents to get back to a dollar. In other words, that 50 cent penny stock would need to grow by another 50 cents, or 100%.
 
To give an even more blatant example, if a $4.00 penny stock dropped to $0.25, it would then need to rise 1,500% to get back to the breakeven point.
 
The question is:  False.
 
 
New scenarios and technologies completely change the rules of investing:
 
The four most dangerous words in the stock market are, "this time it's different."  The balance between fear and greed may look a little bit different from time to time, but the end result is almost always exactly the same.
 
Take a look at the Dot Com Bubble, as just one example - everyone seemed to believe that advancements in technology would override basic principles of operating a business. We all know how that ended.
 
The realities of the stock market will act the exact same way every time, so the correct response should be:  False.
 
 
Gold has more industrial uses than silver or platinum:
 
Gold is an excellent metal for the preservation of wealth, since it typically holds its value even when the worth of the dollar declines.  However, both silver and platinum have many more uses then gold ever will.
 
For example, platinum is used in airbags, chemotherapy treatments, high temperature wiring, and catalytic converters.. just to name a few.  Silver, which is widely known as an industrial/precious metal hybrid, has a certain value for investment, but has real worth in the numerous uses that it has, which means the right answer would be:  False.
 
 
The Pink Sheets is a stock market:
 
Much like the other Dark Markets, the Pink Sheets are simply a transaction network, closer to a garage sale than a stock market. Marketmakers are involved in setting the prices of shares, and generating enough liquidity to enable transactions to take place.
 
Unfortunately, there are sometimes issues with being unable to sell shares even when they've increased in price. At the same time, any prices at which you trade are mainly arbitrary, decided upon by the marketmakers rather than price discovery which you would see from a typical stock exchange.
 
This question is:  False.
 
 
One ounce of gold, or one barrel of oil, can only be sold to one person:
 
This is only true if you have the physical ounce of gold, or the barrel of oil, in your possession. In the vast majority of all cases, the same ounce of a precious metal, or certain amount of fuel, can be leveraged out to as many as 100 different investors.
 
Many exchange traded funds will theoretically be able to sell the legal contract for any commodity to many different individuals at the same time. This is generally not a problem, as long as the majority of people do not actually act on their legal ownership by trying to collect on the asset to which they lay claim.
 
Is an ounce of gold, or barrel of oil, only sold to one person?  False.
 
 
When the company does well, the stock price increases:
 
This is the way things are supposed to work.  However factors like issuing new shares (dilution), how the shares have performed up until that point, the industry outlook, and management's expectations for future results, all come into play.
 
Often the company will be doing very well, but the stock price may be falling. You will see this quite often in events such as, "buy the rumor, sell the fact," which Peter explains here.
 
When the common expectation is for the stock to do so well that investors have driven the price of the shares into overvalued territory, they asset is typically overvalued and due for a fall.
 
Sometimes True, sometimes False.
 
 
The President controls gas prices:
 
Gas prices are a reflection of the value of crude oil, plus the ability for refiners to convert the commodity into fuel.  Logistics, chokepoints, and efficiencies have significantly more impact on how much you are paying at the pump, than do any policies led by governing bodies and decissions.
 
The biggest impact that any politician can have on gas prices would be to adjust the amount of tax applied to each gallon. Even without any adjustments to those levels, you will still see gas prices increase and decrease from one day to the next, based more on the ability to bring supplies to the market than any other factor.
 
So, this comment is:  False.
 
 
Your Rating:
 
If you got less than five correct, you may want to read this article through one more time. You still have a lot to learn, but luckily we'll be here to help enhance your understanding so that you continually profit from your investment forays.
 
If you got 6 - 9 correct, you should be pretty happy with your investment knowledge. There is still room for improvement of course, but at least you are starting from a strong foundation.
 
If the number of correct answers you got was 10 or 11, then you are in the upper echelon of stock market knowledge. With a few small tweaks you will be well on your way to consistently producing a profit.
 
If you get 12 or more correct, then you are a stock market master - at least in terms of your general knowledge. Keep it up, continue to do exactly what you are doing, and always watch for more great opportunities which can come from stock market investing with the right type of knowledge.  Also, maybe considering applying for a job with the Peter Leeds team (we are always hiring)!
 
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Jeffrey H. - 3rd. Year Subscriber
 
 
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