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