By DAVID MOON, Moon Capital Management
If you need another example that Wall Street is full of followers rather than
independent thinkers, General Motors provided it last week.
On May 4, billionaire and sometimes corporate raider, Kirk Kerkorian,
announced that he was adding to his large investment in General Motors.
His new purchases would total 28 million shares, giving him almost nine percent
of the GM shares outstanding. The stock jumped nine percent on the
Nothing was different about GM after the Kerkorian announcement than
before. GM didn't sell a single extra car because of Kerkorian. It
still had union contracts and big pension liabilities. The business was
worth no more or less as a result of the Kerkorian announcement. Yet
investors were impressed that someone else thought the price was attractive, so
they jumped on the bandwagon and began buying the stock.
It wasn't just individuals, either. Institutions were the worst sheep
of the bunch, following Kirk the shepherd around the trading floor.
After the Kerkorian announcement, JP Morgan raised its recommendation on GM
shares. The JP Morgan analysts who cover GM are smart people who make a
lot of money to figure out the value of the world's largest auto company.
And they rely on an 87-year-old corporate raider to make their decisions.
We shouldn't be surprised. The emotions of many analysts cause them to
buy high and sell low. Look at this one example from a well-known,
worldwide brokerage firm. It shall remain nameless to protect the
In April 2002, GM shares traded at $65. A year later they had declined
to $34, at which time this broker finally downgraded its recommendation on the
stock. Then, from April 2003 to December 2003, the stock increased 55
percent, from $34 to $53. After the price increase, the broker changed his
recommendation to 'buy.' The next change in recommendation came in March
2005. By then, GM shares had declined from $53 to $29. What was the
new recommendation after this 45 percent decline? Sell, of course.
It's kind of hard to make money when you buy at 65, sell at 34 and then repeat
the process two more times ' all within three years.
A day following the Kerkorian announcement, Standard and Poor's finally made
its long awaited move to downgrade GM (and Ford) debt to junk status. The
bond market expected this for months; it barely reacted to the news. The
stock market, however, showed none of that rational restraint. Only a day
after being convinced of a higher GM value because of the public opinion of Kirk
Kerkorian, investors sold GM shares because of the S&P announcement.
Do these kind of investors wait to see what everyone else is doing before making
a decision? I bet its real fun to watch these folks order dinner in a
Waiter: 'Ma'am, have you decided what you'll have for dinner?'
Investor/customer: 'I'm not sure. What have you sold the most of
tonight? I just don't know what to get. David, what are you going to
Those kind of people don't need a menu, they just need an example. Just
like the followers on Wall Street.
David Moon is president of Moon Capital Management, a
Knoxville-based investment management firm. This article
originally appeared in the News Sentinel (Knoxville, TN).