By DAVID MOON, Moon Capital
November 20, 2005
In 1988, I was meeting with a client of the accounting firm where I worked. We were discussing the prospect of also managing his retirement plan. He rejected our proposal.
“No one cares for my money like I do,” he explained. “No matter how smart you are or how hard you work, I will do a better job of managing my money than anyone else.”
Clearly, I disagreed with his conclusion. But his rationale was sound. People make better decisions about assets when they own them.
If you own an asset, you are more likely to treat it with care. You will pay more attention to it. And as a result, asset owners are usually rewarded in ways that borrowers or renters are not. A recent study by Harvard Business School and two Argentine universities supports this assertion.
The study followed 1,800 Latin American families for 20 years. All the families had settled onto an abandoned former garbage dump. Through loopholes and legal oddities, about half the families ended up with title to their dump homes. The other half remained as squatters. Neither group paid for their homes, either in rent or as a purchase price. Each group had the same paltry income when they moved onto the dump.
Yet over the next two decades, the families who owned their homes began to climb the economic ladder. Their literacy rates improved, as did key health measures. “You give people titles [to their homes] and they start to feel they belong to society,” says one of the study’s authors.
Comedian Jeff Foxworthy jokes that the great thing about renting your first apartment is that you don’t have to clean it until you’re ready to move and you want to collect your security deposit. “I promise, the back door was missing when we moved in here. That pizza was already on the ceiling.” People behave better when they own a thing. And they have different expectations. They should.
All this applies in spades to financial investments. A share of stock is nothing more than a small piece of ownership in a business. It is not a nebulous entry on a brokerage statement akin to taking Kentucky and the points. If you own a share of Coke stock, you are one of the hundred of thousands of folks who own that company. Most people understand that.
If you own a mutual fund that owns stock in a bunch of different companies, you are an owner of all of those companies. Like the owners of those former “dump houses” in Argentina, you ought to expect to be better off in the long term. Those new Argentine homeowners didn’t become more affluent, however, without a change of mindset and some hard work. Planting shrubs and painting the porch requires work. Repairing the plumbing tested their resolve.
Work and commitment is also required of stockowners. You can’t just pick investments at random or simply because a guy on CNBC recommends it. And you must sometimes have the resolve to stick with your property even when to do so seems like the investment equivalent of working on a septic tank.
Too many 401(k) participants ignore their opportunity to be owners. They invest solely in bonds (or bond funds), CDs and money-market funds. Those investments have their place – but if these participants have long-term investment horizons, they are sadly and needlessly foregoing the life-changing possibilities of patient stock ownership. And too often it is the employees with the smallest amounts of money – the ones who most need the benefits of ownership – who can’t bring themselves to open that door.
David Moon is president of Moon Capital Management, a
Knoxville-based investment management firm. This article
originally appeared in the News Sentinel (Knoxville, TN).