Know Thyself - Internalizing Investing

By DAVID MOON, Moon Capital Management
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 five years.

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 lesson.

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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