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Cause and effect thinking causes investment fumble | ||
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By DAVID MOON, Moon Capital
Management If you think it's irrelevant who wins the Super Bowl this evening, you are obviously lacking a deep understanding of stock market history.
In 1979 New York investment adviser Robert Stovall noticed that when teams from the old NFL (pre-NFL/AFL merger days) won the Super Bowl, the stock market seemed to do pretty well that year. When former AFL teams won, the market didn't do so well.
Tonight's Super Bowl XL ' like Wrestlemania, Super Bowls are counted with Roman numerals ' pits the AFC champion Pittsburgh Steelers against the Seattle Seahawks of the NFC.
So get your rabbit's foot, put a penny in your shoe, spin around three times and say 'great goobly goo' ' because that makes as much sense as trying to find a connection between football games and stock prices.
You're probably much too smart to believe that the NFL controls Wall Street. But otherwise intelligent people regularly draw conclusions about stock prices based on completely unrelated happenings.
Every four years, half the investors in the country fear that some evil Democrat will be elected president and the stock market will go to hell. Most of these folks would be surprised to know that since 1926, the S&P 500 has actually performed better during Democrats' ' not Republicans' ' residency in the White House.
Before my left-leaning friends begin making an investment case for their candidates in 2008, remember this: the president influences Wall Street, if at all, only slightly more than an NFL quarterback. (That's another topic for another column.)
It's human nature to find patterns where none exist. That's why the power of persuasion is so strong. We will easily believe something is true, contrary to all logic, simply because one or more people tell us it's true.
Just because there is a historic positive correlation between two variables does not mean that one of the variables has any predictive ability about the other. Among my friends in college, the best students were the heaviest: In my circle, the guys who weighed the most made the best grades.
There were, of course, exceptions ' a gentleman known as Fat Larry comes to mind ' but I had more friends graduate on time with high GPAs who weighed more than 270 pounds than didn't. Does being large increase one's intelligence? As much as I might like to think so, of course not. I just ran around with people who happened to be both big and smart ' correlation without causality.
Although it's a popular pastime, it is a mistake to try to predict future stock prices. That's almost always a loser's game.
Why? Because short-term price movement is a function of short-term human behavior. I know my wife better than I know anyone else. We've been married almost 21 years, but I can't predict what she's going to do this afternoon. There is no way to predict the cumulative actions of millions of strangers, each of whom has a different personal situation. Your odds are better at a roulette table.
Rather than try to predict human behavior and stock prices, investors are better served by ignoring the actions of others and focusing on the values of the investments they are considering. This keeps them from having to guess when investors are going to favor large-cap or small-cap or international stocks.
Ignore other investors and do what makes sense. If little Johnny jumped off the bridge, would you? Focus on the investments, not the people, and certainly not on improbable ideas.
The Seattle Seahawks didn't join the NFL until after the league merger in 1970, so I'm not sure how they fit into the Super Bowl model. But just to be safe, I'm rooting for the Steelers, an original member of the old, pre-merger NFL.
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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