By DAVID MOON, Moon Capital
February 6, 2005
People invest for different reasons. Some people are driven by
greed. Others are trying to be good stewards. (I'm not sure where
the delineation is between those two, but it's a fine line.) Some people
are fearful. And some folks are just disinterested. My theory is
that people make investment decisions based on the level of emotional maturity
they reach when they are about fifteen years old. Using that hypothesis,
the most prevalent influences on the majority of investors are peer pressure and
the fear of being different.
In kindergarten, kids are already influenced by their classmates'
clothes. By high school, there is some teenage trendsetter in California
or New York (trendsetters are never in Alabama) deciding the wardrobe of every
10th grade girl in the country. Every four-year-old boy wants to play
Power Ranger or Spider Man. And every fourteen year-old boy has to have
the right kind of sneaker.
Things don't change much over the next 30 or 40 years.
Last week, someone asked me for the fourth time about putting some money into
this specific investment. His only reason for wanting to do so was because
everyone he knows is putting a lot of money in it. Some of his friends are
putting their entire retirement plans into this one company.
Ask an employee of any large company about her 401(k) investments.
Chances are, her selections were influenced by the decisions of a co-worker or
spouse. And who do you think influenced the spouse? One of his
co-workers or somebody he saw on television.
There may be safety in numbers when walking to your car at the mall after
dark, but that doesn't have any relevance in the stock market.
In a recent discussion on this topic, a client could only believe that small,
individual investors acted in this emotional way. I argued
otherwise. Why shouldn't the folks who run large investment institutions
look just like the rest of society? Working at Worldwide Conglomerate
Investment Bank does not increase the likelihood of shedding the emotional
baggage of one's youth. Some significant percentage of those people will
be influenced by what other people do, just like they are in any business.
A look at the ten largest U.S. equity mutual funds is interesting. Eight of
the funds hold Bank of America, Microsoft and General Electric among their ten
largest stocks. Seven own Exxon Mobil. Six own AIG. These fund
managers aren't independently and critically managing money; they're all wearing
the same sneakers to school, afraid to be different.
Only two of those ten large mutual funds did not have significant duplication
of the same handful of stocks. Those two funds significantly outperformed
the other eight funds, and the S&P 500, over the previous one, three and
We try to teach our kids to be critical and independent thinkers. When
it comes to investing, we would all be well served to heed the same
David Moon is president of Moon Capital Management, a
Knoxville-based investment management firm. This article
originally appeared in the News Sentinel (Knoxville, TN).