Happy (?) Anniversary

By DAVID MOON, Moon Capital Management
March 13, 2005

Anniversaries are special times. When were you married? When was your first date? When were you divorced? What about the day you started work at your current job? We love to recognize and celebrate important and meaningful events in our lives.

Do you remember the big event from five years ago this week? It was the peak of irrational exuberance.

Five years ago, the NASDAQ Composite was 150 percent higher than it is today. The S&P 500 was 22 percent higher. The Dow Jones Industrial Average, which was never as grossly overpriced as either the NASDAQ or S&P 500, is about where it was five years ago, after recovering from a 35 percent decline. Even after the significant increases of the last two years, many stock investors are less well off than they were five years ago. Sadly, some 401(k) investors still have smaller account balances even after including their contributions over the last five years.

March 2000 is an anniversary to remember, not celebrate.

If we are going to remember it, what should we have learned from the last five years?

Don't buy a stock simply because it has gone up in price. All else being equal, it makes more sense to buy a stock after a price decline rather than an increase. Wouldn't you rather buy something on sale?

Stock prices do have a long-term tendency to increase. This does not mean they will not occasionally decline, sometimes significantly.

Buying a stock simply because everyone else is buying it is a pretty silly investment strategy. Buying a stock because your barber or a fancifully dressed stranger on an airplane is buying it is stupid.

Lots of startup companies fail, even if they have great stories, product ideas and management teams.

Earnings are not unrelated to the value of a company. The value of a company is not unrelated to its price.

An investor ought to have a working knowledge of financial statements. Fewer people in the financial industry understand financial statements than most clients would believe.

It is easier to be wrong than it is to be different.

When people start talking about there being 'a new investment paradigm,' you better find the old investment paradigm.

It may be hard to teach an old dog new tricks, but it is almost impossible to teach a new dog old tricks. (From Warren Buffett.)

If you don't know what a company is worth when you buy its stock, it's real hard to know when to sell it.

Previous price movement is a poor method of picking a stock or predicting future stock price movements.

If a company spends more time selling its stock than selling its product, you ought to avoid the stock. The CEOs of unprofitable start-up companies should not fly first class or make more than a million dollars a year.

Declining stock prices provide opportunities for investors who aren't compelled to be fully invested at all times, regardless of valuations.

Beating the market indices is a lot easier if you aren't obsessed with mimicking, tweaking or being influenced by those indices.

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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