Are you still in the market? Why or why not? And what to do from here on

By DAVID MOON, Moon Capital Management
October 14, 2001

How did you do last quarter?

That was a pretty popular question in 1998 and 1999, when cab drivers were retiring to manage money for their friends and Warren Buffett was tossed aside as a relic of an investment day long since gone. At water coolers, little league games and barbershops, folks swapped stories of IPOs doubling in one day. Really long term investors (say, four or five weeks) bragged of ten percent average monthly returns.

Now, I get emails from investment club members who say their clubs aren't any fun anymore. The students in my class at UT are more interested in making a good grade than finding a profitable investment. (Since some of them graduated from high school, the average stock market return is actually negative. They never knew the hey-days.) Barbers are back to more traditional topics - easy things like politics, religion and fishing. Some individuals, upset over vanished profits, stick their heads in the sand, hoping things will be back to "normal" when they can bring themselves to look at their brokerage statement again.

So, how did you do last quarter?

The S&P 500 declined 14.7 percent last quarter; it declined 26 percent in the last 12 months. Large cap growth funds were down 20.1 percent for the quarter and 43.8 percent over the last year. On the other end of the domestic stock spectrum, small cap value funds declined 13.4 percent last quarter (roughly in line with the S&P 500), but actually increased 4.4 percent in the last 12 months. If we were looking at these statistics two years ago, the roles would have been reversed. Large cap growth funds did well in 1999, while small cap value funds were losing money. The last four years were not normal in any investment sense of the word.

Generally, value and growth styles of investing tend to move in correlation with each other, although seldom perfectly. But when one style increases, the other style usually does, as well. Sometimes the value funds do better. Sometimes the growth funds do better. But in the last four years, we have seen an almost unprecedented extreme in the relative returns of different styles of US stock investing. First the growth funds; now the value funds. If you are one of the many investors who jumped from one bandwagon to the other at the worst possible time, what should you do now?

Despite the get-rich-quick mentality of a couple of years ago, investing in stocks is a long-term venture. Don't invest any money in stocks you know you will need in the next year or two. Period. No exceptions. Not your house down payment, college tuition or vacation money. In the short term, stock prices can and do decline. Sometimes violently. (Such as the 43 percent decline in large cap growth funds in the last year.)

Make sure the investment style in which you are invested suits your personality. Growth funds are more likely to have volatile returns ' both positively and negatively. Value funds are more likely to generate smoother returns, missing out on significant increases during exciting bull markets, but often providing some protection in down markets.

And have a style. Some investors, many pros included, don't have any style at all, but will try to describe their management using the popular investment words of the day. Managers who owned Microsoft at 90 times earnings start using words like 'price conscious.' Folks who previously eschewed any labels, previously calling themselves 'style neutral,' let the word 'value' slip into their vocabulary much more frequently.

Know what you own and why you own it. That's the best recipe for avoiding panic.

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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