By DAVID MOON, Moon Capital
September 30, 2001
In a CNN interview last week, the editor of a major news magazine said of the
recent decline in stock prices, 'we have never been this close to the bottom
before.' I wasn't quite sure what he meant.
Either he did not mean exactly what he said, or he is in the wrong job.
It is impossible for the market to be closer to a bottom than it has ever
been. It can, of course, be just as close to a bottom as it previously
has, but only when it actually reaches the bottom ' and this can only be known
If 'the bottom' to which he referred is the bottom of this specific bear
market, his comments are just a statement of this obvious. The Dow Jones
Industrial at 8,200 is closer to its eventual cyclical bottom than it was at
9,000 or 10,000. If the market drops to 7,000, it will then be closer to
the bottom than it is now. If that happens, perhaps the editor will call a
press conference and let us all in on the secret.
In times of uncertainty, people say and do illogical things. It is our
nature. When circumstances are emotional, too often we respond with more
emotion. When stock prices were irrationally high, people invested out of
fear ' fear they might miss an easy profit. (Not coincidentally, this is
the same type of emotion that drives people of modest means to pour money into a
Fear still drives many investors. But today's fear is that stock prices
will continue their decline, jeopardizing years of savings and some people's
plans for retirement. Panic is the wrong response, but what should fearful
Since the stock market peak in March 2000, the S&P 500, Dow Jones
Industrial Average and NASDAQ Composite have declined 33, 20 and 68 percent,
respectively. Many funds that had fantastic returns in 1999 are now down
60, 70 and 80 percent. Looking in the rearview mirror, however, will not
help you reach your next intended destination. (But it can help you avoid
some of the same mistakes next time they tempt you.)
On September 11, the Knoxville Police Department reports crime activity in
the city practically stopped. Like the rest of us, the participants in the
'unreported economy' watched the news and wondered about the future. The
next day, burglaries and drug deals picked up a bit. By Thursday,
September 13, criminals were back in full swing, much to the delight of the
city's defense attorneys. Don't expect any less from more law-abiding
citizens. People will keep eating, drinking, shaving and recreating.
They may postpone buying new ones for a while, but people will keep driving
cars. Yes, we will eventually have a recession ' and it may be sooner,
rather than later. Recessions happen. So do the normal oscillations
of stock prices from irrationally exuberant to fearfully cheap.
Are prices now fearfully cheap? Some analysts think so. Others
disagree. Interestingly, some of the bullish analysts are the same ones
who warned of excessive prices during much of the last three years. Some
of today's most panicked investors ignored the warnings until it was too
late. Now that prices have collapsed, they are rushing to close the
proverbial gate after the cow has escaped.
Based solely on earnings, the S&P 500 was likely still at least 20
percent overvalued a month ago. Now that the index has declined 7 percent
in the wake of the terrorist attacks, the P/E (based on trailing earnings) is a
somewhat more modest 25. That is more reasonable, but nowhere near bargain
levels. The bearish argument is that earnings are likely to decline next
year, causing a decline in the index regardless of its P/E level. That may
happen. But investors who ignored earnings during the run-up in stock
prices were only concerned about where stock prices had been and where they
might go. They were not concerned about where stock prices should
be. Now that fear has them in its pessimistic grips, they look to whatever
tool supports the position their emotion causes them to have. Invest
logically, not emotionally.
David Moon is president of Moon Capital Management, a
Knoxville-based investment management firm. This article
originally appeared in the News Sentinel (Knoxville, TN).