Don't get too upset when the next surprise comes because it will

By DAVID MOON, Moon Capital Management
July 21, 2002

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 destructive.

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 unexpected.

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).

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