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Trying to call the stock market's bottom (or top) is recipe for disaster | |||
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By DAVID MOON, Moon Capital
Management I have a friend whose hobby is writing titles for imaginary country music songs. My favorite is 'I Can't Get Over You 'till You Get Out From Under Him.' It doesn't matter that this song has never been written; everyone immediately understands its message. Country music is like that. Simple chords, simple themes and simple, identifiable stories. Sometimes we look for answers that are more complicated than they need to be. All else being equal, the simplest solution is usually the best one. Too often, we look to statisticians, economists and, perhaps even fortunetellers, when all we need is Garth Brooks. Thank God for 'Unanswered Prayers.' I thought of this old Garth Brooks' song while talking with a client last week. Actually, he is only barely a client. He decided to hire us several weeks ago, after experiencing horrendous losses over the last several years in his various managed accounts. As soon as his cash reached his new Moon Capital Management account, the Dow Jones Industrial Average began an especially torrent weekly decline, even for these perilous times. Our new client panicked. He called and instructed us not to do anything in his account. He admitted he was afraid and did not want to buy any stocks at that point. After ten terrible days of stock market returns, he instructed me to go ahead and begin buying stocks, if I 'thought we had reached a market bottom.' I tried to explain that we never forecast market tops or bottoms. People who try are foolish. 'Yes, I understand,' he replied. 'But don't you just think if you had to predict a market bottom, this might be it?' He desperately wanted someone to ring the bell and tell him when the market reached the bottom. But this would be the worst thing that could happen to him right now. This is a prayer that is best left unanswered. If I predict a market bottom, there are only two possible outcomes: either I will be wrong or right. If I predict this as a market bottom, but then it turns out we see Dow 6,000 before we see Dow 12,000, our new client will feel whipsawed again. He will almost certainly panic and sell his stocks at Dow 6,000, and never enjoy Dow 12,000. Clearly, this is not a good outcome. But the worst outcome would be if we were right. If we forecasted a market bottom and were somehow correct, he would expect us to do it again, or to tell him when the market reaches a peak again. This is a sure recipe for disaster. Sort of like someone convincing himself he has a talent for choosing heads or tails when a coin is flipped. The last time we experienced a stock decline anything like the current one was 1987. In only three months that year, the Dow declined from 2,700 to 1,700. An equivalent decline from our most recent market peak would be about 7,400 ' pretty darn close to where we are right now. In October 1987, millions of investors panicked, sold their stocks and waited for the elusive market bottom. Some are still waiting. Others jumped back into stocks in 2000, at another market top. Many of those people are selling now. No matter how badly you may want someone to ring the bell and signal the end of the bear market, that prayer is best left unanswered. Garth Brooks trumps CNBC. 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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