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October: Never a good month in which to speculate on stocks (or anything else) | |||
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By DAVID MOON, Moon Capital
Management October. This is one of the peculiarly dangerous months to speculate in stocks in. The others are July, January, September, April, November, May, March, June, December, August, and February. - Mark Twain in Puddin' Head Wilson During the third quarter of this year, the S&P 500 and NASDAQ composite declined 17.63 and 19.90 percent respectively. This followed the second quarter in which those two indices declined 13.73 and 20.71 percent. Since the first of the year, they have each experienced a 29 and 40 percent declines. These declines follow 2000 and 2001, when the S&P 500 and NASDAQ declined a cumulative 41 and 52. Since its peak in March 2000, the S&P 500 has declined 49 percent; the NASDAQ is down a whopping 78 percent. And now we're in October. Last week I wrote about the impact of perception on our reaction to events ' particularly when two events are so similar. I wrote about reaction to certain longstanding investment banking and brokerage practices that are only now considered inappropriate ' now that the market has declined more than 50 percent. But, the power of perception also permeates every area of our life ' particularly including almost every area of our investment life. Three years ago, if someone offered you the opportunity ' even if only for a brief moment ' to buy the Dow Jones Industrial Average at 7,500, how would you have reacted? At the time, the Dow traded at 10,545. Every slight decline was considered a buying opportunity. Doctors were becoming day traders; barbers were becoming brokers. And brokers were trying to decide whether to spend early retirement on their yacht or winter villa in South Florida. What's so different about 2002 from 2000? People's perception. And stock prices. But lower stock prices actually lower investment risk. In early 2000, too many investors believed neither they nor the market could do wrong. Today, many of those same investors are panicked. Their dreams are dashed; their thoughts of early retirement long surrendered. In many sad cases, previously implemented retirement plans are being reviewed or reversed. Intellectually, many of these people knew that their 20 percent annual gains of the late 1990s would not last forever. But they never dreamed they might have to sustain 20 percent annual losses for some period of time in exchange for the possibility of those gains. They never perceived that risk - the perception problem. As surely as many of those investors never perceived the risks inherent in the wild and reckless decisions they made in those glory years, their perception of looming risks today is similarly flawed. Many panicked investors are selling their stocks and moving them to the perceived safe haven of bonds ' at a time interest rates are at historic lows. If interest rates significantly increase from these levels, these panicked market timers will have sold stocks at relative lows and moved their money to bonds at relative high prices. Selling low and buying high is seldom a recipe for investment success. Other panicked investors, wise to the risk of increasing interest rates, may instead choose to sell their stocks and hold the proceeds in cash or even, perhaps a wooden box buried in their backyard. After speculating on stocks for years (the last several of which stock prices did nothing but decline), this strategy perceives the risk of stocks as greater than the risk of cash. In the short term, this may be true. But whatever risk exists in the stock market today, it is considerably less than almost three years ago when the Dow was 50 percent higher. It is only people's perception of that risk that has increased. Mark Twain was right; there never is a good time to speculate. But speculation can occur in many forms and packages, most of which are not apparent until well after the fact. 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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