How to Become a Sophisticated Investor

Test Paper. Term II.

Match the legal terms and their definitions.

1. Access	1. a judge’s acceptance of evidence in a trial.
2. Adequate remedy	2. 1) fairness. 2) moral rightness. 3) a scheme or system of law in which every person receives his/ her/its due from the system, including all rights, both natural and legal.
3. Admission of evidence	3. in criminal law, a money fine or forfeiture of property ordered by the judge after conviction for a crime.
4. Bachelor of Laws	4. in real estate the right and ability to get to the property.
5. Court	5. the shorthand symbol for "contract" used almost universally by lawyers and law students.
6. Justice	6. a remedy (money or performance) awarded by a court or through private action (including compromise) which affords "complete" satisfaction, and is "practical, efficient and appropriate" in the circumstances.
7. K	7. 1) the judge, as in "The court rules in favor of the plaintiff." 2) any official tribunal (court) presided over by a judge or judges in which legal issues and claims are heard and determined.
8. Law	8. a written statement of good quality of merchandise, clear title to real estate or that a fact stated in a contract is true.
9. M. O.	9. the degree in law from a law school, abbreviated to LLB, which means that the recipient has successfully completed three years of law studies in addition to at least three undergraduate years on any subject. Since the early 1960s most accredited law schools grant a Juris Doctor (JD) degree instead of the LLB.
10. Penalty	10. any system of regulations to govern the conduct of the people of a community, society or nation, in response to the need for regularity, consistency and justice based upon collective human experience.
11. Warranty	11. slang for modus operandi, the way or pattern in which a repeat criminal usually commits his/her crime.

Read the article and answer the questions.

How to Become a Sophisticated Investor

No one doubts the value and importance of investor education and sophistication, but many investors are not really all that sophisticated. Goldman Sachs was scrutinized for marketing complex securities to its investors without telling them that a major hedge fund had taken a short position against these securities. The so-called sophisticated investors lost about $1 billion in this synthetic collateralized debt obligation (CDO).

The SEC investigation of Goldman Sachs has emphasized that even institutions rely on sellers and may be misled just like anyone else. This is particularly, but by no means only, the case for highly complex products, which “you need a PhD in finance to understand”. Indeed, critics at the time commented that the distinction between sophisticated and unsophisticated is artificial or doesn’t even exist, at least not where there is provable negligence and mismanagement.

Nonetheless, education and knowledge are probably the most effective tools for raising returns and lowering risk; and in particular, for avoiding truly disastrous losses. Sophistication, in the sense of learning how to get the best out of your money and from the investment industry, is fundamental. But it does not and should not in any way reduce the responsibility of sellers to make clear what they are promising and to do just that.

In this article, we consider how to ensure that you really and truly understand your investments and don’t overestimate your capabilities and knowledge. Furthermore, it is necessary to make sure that what you know and don’t know are not used against you at some point in the future.

What is a “Sophisticated Investor”?

In the sense used here, we mean someone who has sufficient investing experience and directly relevant knowledge to weigh up the potential risks and benefits of an investment opportunity. In other words, the person genuinely understands what he needs and wants, and what he is getting from the seller.

At a minimum, such investors will ensure that their portfolios are 1) sufficiently diversified, 2) monitored regularly (by themselves or someone else) and that 3) inertia is avoided, so that buying takes place when markets are relatively low and vice versa. Investors who fail to heed these three basic principles are most certainly not sophisticated. We are not referring specifically to a legal concept here, but rather how to be sophisticated in such a way as to do well with your money.

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