By DAVID MOON, Moon Capital Management
On October 28, 1929, the US stock market suffered its second worst single day
percentage decline. (October 19, 1987 was the largest.) The carnage
that day is often thought of ushering in the Great Depression. The next
day, Earnest Calkins, a New York resident, penned a letter to the New York
Times. In the letter, Calkins argued that investors were overreacting to
the apparent short-term decline in wealth.
"I have a feeling that fewer persons are affected by the stock market drop
than one would infer from the figures, just as fewer persons were affected by
the previous rises. As far as I am concerned a group of men, technically
known as the Stock Exchange, gets together and decides that my Telephone
Telegraph stock is worth $310 a share, and I experience a momentary glow of
elation. A few days or weeks later they get together and decide it is only
worth $232, and I have a feeling of disappointment, also momentarily. It
is unlikely that the slump will affect the continued use of the telephone or
that the company will be unable to continue to pay the $9 a share
Calkins would be right at home in today's market.
The overall stock market is down significantly in the past three years.
We always have a logical ending point to which measure our performance: the
present. But determining an appropriate beginning point is a bit more
difficult. How is the market doing? Since March 2000, it is down 45
percent. But in the last 4 ' months, it is up eight percent. And
since 1982, the market is up more than 300 percent. So how is the stock
Mr. Calkins' letter goes on. "Doesn't it seem probable that mine is the
situation of a great majority of holders of this and other good stocks?
That they have merely lost some of their spectacular gains? My profits the
last few weeks have been paper profits, and my losses the last week are paper
losses, and one cancels the other."
Sure, Calkins' logic may make sense if you actually enjoyed the paper
profits. But what about the number of people who only bought stocks after
missing the paper gains enjoyed by others? Now that the losses have
arrived, they have no paper gains against which to cancel those losses.
Those people need to look forward, not back. If you bought some crazy
Internet fund in 1999, you simply paid significantly more for that asset than it
was worth. You screwed up. You can't change that now.
But what if instead of a crazy Internet fund, you decided to finally take the
stock plunge and purchase the S&P 500? You had been waiting, thinking
stocks couldn't go any higher. Then you gave in. You thought you
were being safe by purchasing a group of well-known, large businesses. But
the problem is that even many of those businesses were overpriced. It was
simply the wrong time to buy those stocks. And trying to time the market -
either looking for market tops or bottoms - is almost always a losers' game.
The end of Mr. Calkins' letter is an especially good parable for us
"It reminds me of the farmer who told a neighbor that Josh Stebbins had
offered two hundred dollars for his horse."
"'Josh Stebbins ain't got two hundred dollars.'"
"'Yes, I know, but ain't it a good offer?'"
David Moon is president of Moon Capital Management, a
Knoxville-based investment management firm. This article
originally appeared in the News Sentinel (Knoxville, TN).