Smart investing doesn't need $10 words

By DAVID MOON, Moon Capital Management
July 18, 2004

In the late 1980s, I attended a presentation by legendary mutual fund manager, Mario Gabelli. During the Q&A, a questioner, apparently eager to impress someone, asked, 'Mario, I see that your historic trailing three-year beta is lower than that of the S&P 500, yet in this last bear market your fund declined more than the overall market. How do explain this, especially given your positive alpha and in light of your standard deviation?'

Gabelli, both intelligent and learned, feigned ignorance. 'I'm not sure exactly what you just said. Were you calling me a standard deviant?'

Gabelli knew exactly what the guy was asking, although the answer was irrelevant to his investment process his evaluation of that process. But asking the question made the guy feel smart and important, at least until Mario exposed its silliness and irrelevance.

The lesson stuck with me.

I think about this often when I read or see the newest hot investment product or strategy to capture attention. I love the ones where, in the name of 'tactical asset allocation' or 'strategic account rebalancing' or some other nifty sounding moniker, people do nothing other than try to buy low-priced assets and sell high-priced ones. It's a pretty simple concept and hardly new. But if you put a fancy sounding name on it, including maybe even using the term 'proprietary,' you can impress a bunch of unsuspecting people. To my knowledge, it is not proprietary to try and buy low/sell high.

(If you are not between the ages of 40 and 65, skip the next paragraph.)

While some people use fancy names to describe simple processes, others use even fancier names to describe processes that are otherwise indescribable and worthless. These folks remind me of Arlo Guthrie's, 'Alice's Restaurant.' As soon as these advisors pull out their ten-dollar words and their complicated charts, I start hearing Arlo: ''with the twenty-seven 8 x 10 colored glossy pictures with the circles and arrows and a paragraph on the back of each one.' We have discovered the officer Obie's of the investment word.

Genius isn't required to be a successful investor. Discipline, logic, some basic math skills and common sense are a lot more important than the ability to look at a string of numbers and mentally calculate a variance and standard deviation.

Most people who rely on fanciful words, pictures and 'strategies' are specifically looking for ways to make a fairly simple process sound complicated. They don't want you to know it's simple, or they don't understand it themselves. If I use a bunch of words you don't understand, I'll intimidate you from asking hard questions; after all, who wants to look stupid? If you don't understand what I'm saying, odds are, you'll be impressed by it. It works at the doctor's office, why not in investing?

Peter Lynch once said that if you can't explain to a bunch of third graders why you own a stock, you shouldn't own it. That strategy would make sense to Mario.

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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