Making the stock market work for you necessitates bucking trends

By DAVID MOON, Moon Capital Management
June 24, 2001

A few weeks ago, I met with a gentleman and discussed the investment of his retirement and personal funds. He was about to receive a somewhat unexpected financial windfall. Until recently, he had been extremely conservative, investing most of his retirement money in bond funds. He had a small exposure to stocks but wanted to increase his stock exposure with part of his newfound wealth. His plan was to put the money in stocks about a year from now, or when stock prices clearly start going back up.

His plan is not uncommon. But it isn't logical.

He wanted to wait a year before putting any money into stocks. Why a year? Why not four months? Or 18 months? He chose 12 months because it seemed like a good round number at which time the stock market's recent malaise should be over. But there isn't any reason to think that today's stock market trends will be any different a year or a week from now. Besides, even with a stock market that is moving in a certain direction, there are plenty of stocks whose fortunes run counter to the overall market.

Consider his second reason to wait to put money in stocks: he wanted to wait until prices started going back up before committing any money to the stock market. Would you do that if you were considering buying a car? 'I know you just knocked $2,000 off the price of this new Yugo, but I want to wait and see what happens to the price. If you increase the price back to the sticker price, I will probably buy one then.' Would you wait to see if a seller increased her asking price for a house before making an offer? Of course not. Then why do it with a stock?

Many people think of their house purchases differently than they do the stock purchases because they understand houses better than they do stocks. If you don't understand something, you are more likely to rely on the reaction and confirmation of others to validate your purchase decision. In other words, if stock prices seem to be increasing in general, you are apt to think you should be safe buying stocks, because everyone else is buying stocks.

When you buy a house, however, you have an idea of the true value of the house. You know the price per square foot of the house you are considering ' and the similar price for other houses in the neighborhood. You have some idea of the replacement cost of the house. You research the neighborhood schools and know how close the house is to the grocery store or your workplace. You know, within some range, how much a house is worth before you make an offer on it. As a result, you have the confidence to buy when others are selling and to wait when everyone else is buying. You do not need the herd to validate your housing decision.

If you treated your stock purchases similarly, you would look at periods of generally declining stock prices as an opportunity, rather than a hardship. You would not need the stock market to give you the courage to make a buying or selling decision. Can you imagine deciding to wait a year to buy a house because you think it might be more expensive then? People do this with stocks all of the time.

David Moon is president of Moon Capital Management, a Knoxville-based investment management firm. This article originally appeared in the News Sentinel (Knoxville, TN).

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