By DAVID MOON, Moon Capital Management
Last week on this page, a News-Sentinel business editorial writer seemed to
make an argument in favor of stock market timing, 'Much of life is just about
good timing,' he wrote. 'Great timing'get rich.' Taken at its face,
this comment suggests that investors can, and should, wait for market tops to
sell stocks and hold cash until the market hits bottom. Buy low, sell
high. The only problem with this plan in the long term is that it is
impossible. Last week's writer should be ashamed (and possibly publicly
flogged) for implying otherwise.
I should know; I was the writer who unwittingly made the suggestion.
Last week, I told the story of America Online founder, Stephen Case, who
seems to have perfect investment timing. He started America Online at the
right time. He bought Time Warner at the right time. He began
selling some of his AOL Time Warner shares at the right time. If Steve can
do it, why shouldn't the rest of us try?
Because none of us are Steve Case.
It's not because Steve has some special stock market gift the rest of us
lack. You simply cannot use someone else's good luck (or even judgment) as
rationale for your own decisions. Assume we hold a coin tossing contest
with 1,000 people. After the first round, 500 of the individuals would
have incorrectly predicted the outcome of the coin flip; 500 'winners' would
remain. After the second round, 250 players would be left. After 10
rounds, we would have a single champion coin flipper. He would have
correctly 'predicted' the coin toss 10 consecutive times, despite facing
1,000-to-1 odds. But this individual has no gift for coin tossing; he was
just lucky. Someone had to be the winner.
Think back to the financial and investment uncertainty following last year's
terrorist attacks. The S&P 500 increased 10 percent in the three
months immediately following September 2001. In 1991, we had just
concluded our first calendar year of S&P 500 decline since 1982, oil prices
were skyrocketing, 500,000 U.S. troops were sitting on the doorstep of Kuwait
and interest rates were heading higher. The S&P 500 increased 30
percent that year. Who would have predicted that?
And in a short 3 weeks in 2000, the NASDAQ Composite declined 33 percent,
following months of worship by much of the investing/gambling public.
Your homeowner's insurance probably costs you several thousand dollars a
year. If you cancel your insurance and your house does not burn down, was
canceling your insurance a smart 'investment?' Absolutely not. It
was a dumb gamble, regardless of the outcome. The potential gain may have
been known (the amount of premium savings). And although the odds of a
loss are small, the cost of a loss would have been huge. Just like the
cost of being uninvested in stocks in the fourth quarter of 2001 was huge.
The key is to always be in the game, but in a smart and measured way.
If you are out of the market, you run the risk of missing significant
gains. But never gamble, no matter how tempting the jackpot. Even in
the most volatile and messy of stock market and economic conditions, there are
stocks that are cheap and safe. They may not be wild and exciting, but in
the last two years, we've learned that wild and exciting is not a good
investment strategy, except for a few people, like Steve Case and the winner of
our coin tossing tournament.
If you don't play the lottery, the odds of you winning it are zero. But
if you do play the lottery, the odds of you winning it are only slightly
better. Guessing when to be in and out of stocks is gambling; you may
occasionally win the gamble, but not over years of 'playing the game.' And
when you do eventually lose, the costs can be devastating.
David Moon is president of Moon Capital Management, a
Knoxville-based investment management firm. This article
originally appeared in the News Sentinel (Knoxville, TN).