By DAVID MOON, Moon Capital Management
My children recently celebrated their second birthday. With
two-year-olds in the house, my life is full of surprises. Even at this
young age, it is obvious that my son and daughter have distinct and unique
personalities. My son, for example, is a comedian. Ask him his name
and he will respond with a serious glare, then reply 'poopoo.' Then he
flashes a grin that is both sinister and childlike ' and begins laughing.
So do most adults who see his little act. It is a pretty funny
surprise. My daughter surprises people in another way. One recent
morning at the Waffle House, I spread a number of sugar packets across the table
and asked my 24 month-old daughter to count them. She studied the packets,
confidently looked up at my friend and correctly answered 'five.' My
friend, a professional at the University of Tennessee, was surprised. (It
would be more accurate to say he was tricked, however, since she answers 'five'
any time she is asked a numeric question.)
There is nothing inherently shocking about the word 'poopoo' or 'five.'
In a certain context however, these words are quite surprising because they are
unexpected. No one ever expects a surprise; that's what makes it a
surprise. In one case the surprise is humorous. In the other, it is
deceivingly amazing. Surprises can be pleasant, or they can be
Wall Street has provided more than its share of destructive surprises
recently. After S&P 500 declines in both 2000 and 2001, few market
observers or forecasters expected a third consecutive annual decline.
Surprise, surprise. No one knows what the second half of the year will
bring, but in the first six months of 2002, the S&P 500 and NASDAQ declined
13.79 and 24.98 percent. Surprise. This week, US dollar reached a
new low against the new European euro. More surprise.
The most painful investment shocks are seldom from events we expect.
One does not have 'expected catastrophes.' Catastrophes and disasters are
unexpected ' just like a twenty or thirty percent decline in the price of a
stock you own. You never expect that to happen with your stocks ' or you
wouldn't own them.
Wall Street thrives and dies from surprises. How else would a stock
price decline after a company reports an earnings increase? It happened to
Johnson and Johnson this week after reporting a 12 percent net income
increase. Investors expected more; they were negatively surprised by the
size of the increase.
The most dangerous leering investment risk is not likely to be a declining
stock market. Given recent performance, that wouldn't surprise many
people. The most dangerous risks will be the ones that surprise us ' the
ones that seem to come out of left field.
It could be from a variety of areas. It could be the bond market.
Bonds have been a safety haven in the last few years. They have enjoyed a
twenty-year bull market. It could be inflation. Or residential real
estate. Or, like 1990, war. Whatever, it is, it will be
We will have a next big risk. We always do. Those who expect
otherwise are likely in for some deep poopoo.
David Moon is president of Moon Capital Management, a
Knoxville-based investment management firm. This article
originally appeared in the News Sentinel (Knoxville, TN).