By DAVID MOON, Moon Capital Management
When I saw the pictures of naked prisoners in the Abu Ghraib prison, several
thoughts crossed my mind. I also have certain thoughts every day when I
read of another US soldier killed by an Iraqi militant or see video of another
American getting his head sliced off.
But of all the reactions I've had to these images, never have I concluded
that Coca Cola or General Motors are less valuable as a result of the
developments in Iraq. Apparently, I am in the minority. News
headlines over the past few weeks report things like 'Stocks Drop on Iraq Woes'
and 'Prisoner Abuse Sparks Selling.'
Once again, investors are being moved by their emotions rather than their
intelligence. (In the case of some investors, however, their poor
decisions probably are an accurate reflection of their intelligence, rather than
Greed and fear are opposite sides of the same coin. The same type of
emotion that prompts someone to buy a stock solely because it has already
increased 50 percent in price is similar to the motivation of an investor who
sells a stock simply because Tom Brokaw's nightly report is depressing.
Neither investor bases his decision on the specifics of the stock they are so
passionate about buying or selling.
At the Ohio State Fair in 1880, General William Tecumseh Sherman was right
when he said, 'War is hell.' But his comments were intended to describe
the personal and physical carnage he had witnessed in two wars. He was not
referring to Wall Street.
It is human nature to perceive causation and patterns where neither
exists. Wars, even the two worldwide versions experienced in the early
20th century, have not necessarily caused horrible short term economic or
investment outcomes. (The longer term economic impacts of wars are
multifaceted and not easily described in a sentence, or even a few pages.)
Yet investors regularly sell stocks in reaction to geopolitical events, rather
Stock returns over any specific period are a function of several
variables. The earnings and changes in the financial condition of
companies are important, as is the general level of interest rates. When
measuring the performance of a stock over any discrete period, however, the
beginning price of the stock is also a big determinant. If a stock is
grossly overpriced at the beginning of a year, changes in interest rates or
earnings may have little to do with how the stock price moves that year.
The price may decline simply as a reconciliation of the price and value of that
specific company. The same possibility exists for cheaply priced stocks as
Albert Einstein was right: 'Everything in life should be made a simple as
possible, but not more so.' Valuing stocks is a fairly simple process that
requires making a few dispassionate estimates after having an understanding of
the underlying business. But it is not as simple as letting the headlines
from page A1 of your newspaper drive your decisions.
David Moon is president of Moon Capital Management, a
Knoxville-based investment management firm. This article
originally appeared in the News Sentinel (Knoxville, TN).