There will be no new stock recommendations this month as we prepare for the bargain stock season at the end of the calendar year. For now, I want you to get your mindset in working order so you can take advantage of this upcoming annual market cycle. The best technique to accomplish this is to understand your own investor psyche. 
Many of you are aware that I am a big fan of the Wall Street Journal’s Jason Zweig and his Intelligent Investor column.  In October, he presented his test to determine “What kind of investor are you?”
I recommend that you take his test now to properly prepare for our year-end:

What kind of investor are you?

The Internet is a morass of “risk-tolerance quizzes” that ask questions like:

• If the stock market falls 20%, will you: sell, hold, or buy more?
• How important is it to you to keep your money “safe”?
• How long is your investment horizon?
• How knowledgeable are you about investing?

But these quizzes are circular: If you knew for certain what you would do when the market crashes, if you had a clear sense of how much you value safety, if you were positive how long you can wait until you need your money or if you knew the limits of your own knowledge, then you wouldn’t need to sit around filling out a questionnaire, would you?

What’s more, a vast body of research shows that people aren’t very good at predicting their future emotions, their future needs  or their tolerance for financial risk.

Finally, humans are notoriously overconfident, exaggerating how much we know about just about everything, including investing.  So even if you believed you knew how to answer questionnaires like these, your answers might very likely turn out to be wrong.
There’s a simpler and better way. In the first edition of his classic book “The Intelligent Investor” (1949), Benjamin Graham, the great investor who was Warren Buffett’s mentor, defined what makes an investor intelligent. The kind of intelligence Graham had in mind wasn’t a function of IQ or graduate degrees; it “is a trait more of the character than of the brain.”

Graham went on to explain that investing intelligence consists of:

• “judging independently”
• self-control and patience, or as he put it: “freedom from effort, annoyance, and the need for making frequent decisions”
• “the avoidance of any serious mistakes or losses”
• and the “firmness” to stick to “relatively simple principles.”
  

At MarketPsych.com, you can take an “Investor Personality Test” that takes 15 or 20 minutes to fill out and, based on my results, at least, seems to give a fairly accurate picture of what makes you tick.  The test skips all the nonsense about what you think you would do if the Dow crashed or how much you believe you know about the markets.  Instead, it measures five dimensions of personality: agreeableness, extraversion, openness, emotional sensitivity and conscientiousness.  It also measures a variety of secondary traits, including optimism, overconfidence and excitement-seeking.

If you must know, I scored low on:

• extraversion (“You are introverted and probably tend to be quiet and low-key…more likely to prefer being alone…probably more thoughtful, reserved, and serious than others”)
• emotionality (“You are relatively more calm, emotionally stable, and free from persistent negative feelings,” although “You may be reckless in dangerous situations and take more risks than others [sometimes without knowing that you are doing so]”)
• overconfidence (“likely to be realistic about your investment knowledge and expected returns”)
• risk aversion (“in combination with adequate self-discipline, education, historical knowledge, experience, and preparation, a low score on risk aversion is usually beneficial for investors”)
• immediate gratification
• excitement-seeking
• herding
  

I scored above-average on

• conscientiousness (“dependable and moderately well-organized”)
• over-optimism (“often believe that ‘everything is going to work out for the best’ ”)
• impulse control (can “persist at difficult or unpleasant tasks until they are completed”)
  

My score was high for

• agreeableness (“You generally value getting along with others…likely to believe that people are basically decent and trustworthy”)

And I scored “very high” on

• openness (“tend to think and act in individualistic and nonconforming ways”)
  

 Although being rated highly agreeable came as a bit of a surprise to me – and perhaps will be a genuine shock to my family and my editors – the rest of my scores seem on target.  The test seems well-designed, perhaps because it was put together largely by Richard Peterson, a psychiatrist and neuroscientist who specializes in studying the behavior of investors and traders.

If you take the test, you get a personalized report that puts the findings in context and shows you how to use your scores to pinpoint your weaknesses as an investor.  You can also learn more about what the results mean in a short research paper.
Best of all, this is one of the rare risk-tolerance tests that won’t put you on a contact list for a broker or financial planner to pester you into forking over your money.