Fables, fairy tales can provide good market advice to astute investors

By DAVID MOON, Moon Capital Management
July 8, 2001

Rock a bye baby, in the tree top,
When the wind blows, the cradle will rock,
When the bow breaks, the cradle will fall
And down will come baby, cradle and all.

I was shocked recently when, for the first time in almost 40 years, I read these lyrics. It is a pretty frightening picture. A baby, left alone in the woods, is thrown to the ground by a branch-breaking, tree-tumbling wind storm. This violence is supposed to be suitable for children? I am waiting for a child murderer to claim he was subliminally motivated to throw babies out of trees by his mother’s singing of this nursery rhyme. We need a blue-ribbon government task force, a nursery rhyme rating system and V-chip.

Some children’s literature, however, is almost surprisingly valuable as “Rock-a-bye baby” is shockingly violent. Aesop’s story of the “Tortoise and the Hare” should be required reading by all investors. University of Maryland Terrapin sports fans carry banners warning opponents to “Fear the Turtle.” Until re-reading the “Tortoise and the Hare,” I wondered if the fans realized how stupid they look trying to intimidate folks with a turtle. Turtles don’t even make much of a noise. But their shell allows them to play pretty good defense in nature. And without tenacity, a turtle would never get anywhere in life. Aesop reminds us of the power of the turtle.

Consider this experiment: Imagine you save a penny today, then save two pennies tomorrow, four pennies the following day and so on, doubling your saving amount each day. By the end of one month, you will accumulate over $16 million. Simple discipline works to the benefit of both investors and turtles.

The most astounding revelation of this exercise is not the compounding effect, but the timing effect. You accumulate 97 percent of the $16 million in the last five days of the month. In the first five days, you only save a paltry 24 cents. Midway through the month, you have $245, enough to strain your back lifting it, but hardly enough to inspire visions of Robin Leach jetting to you vacation villa. To experience the full benefit of compounding, you must be willing to persevere, just like Aesop’s turtle. Of course, it is often boring and not nearly as sexy as a get-rich-quick plan, but getting rich slowly almost always trumps trying to get there overnights.

Consider the investor who sells a stock simply because the price hasn’t moved enough to suit her in a number of weeks, months or maybe even years. The stock will often double or triple in price, almost immediately following the frustrated investor’s sale. Just as a penny collector needs the knowledge that his exercise will ultimately provide great rewards, a stock investor needs knowledge about the company and its underlying value. If the value of the business continues to increase and the stock price does not, ultimately the price will move to meet the value. And it may happen in the last 20 percent or so of the time you own it.

During the tech market mania of 1998 and 1999, investors were fixated on annual, quarterly and even daily returns. Many investors, fully0invested in NASDAQ companies in 1999m began extrapolating their 50 percent or 80 percent or even 100 percent returns from that year into the near future. All they had to do was have one more year (or maybe even six months) of these (extraordinary) returns, then they could retire. Man y of those investors are now looking at 50 percent or greater losses over the past 18 months. The turtle passed the by. Fear the turtle.

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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