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Investing on Your Hands and Knees | ||
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By DAVID MOON, Moon Capital Management Our twins just celebrated their sixth birthday with a party that, in my opinion, rivaled the complexity of a British coronation or a rural Alabama county fair. One of my responsibilities in preparation for the big day was weeding the flowerbeds. For two days. Imagine my disappointment when none of the six-year-old party attendees commented on the freshly-groomed status of our landscaping. Not surprisingly, they were more interested in the snow cones and trampoline than the roses and mulch.
I had plenty of time to think during my 15 hours in the mulch and mud. (We either have lots of flowerbeds or lots of weeds.) Here's what I thought: everyone needs to regularly pull the weeds from their portfolio.
The landscaping/investing metaphors are numerous. Like a flowerbed, everyone ends up with things they'd rather not have in their portfolio, and the longer they let these weeds fester, the more their portfolio suffers.
Ideally, you'd pull a weed from your portfolio the moment you realize you made a mistake in buying the stock. But few of us stop to pull a single weed when we notice one in the yard; we wait until some artificial event, such as the changing of a season or preparing for a party. Many of us don't weed our portfolios until January or when we prepare our tax returns.
Sometimes it's hard to tell the difference between a weed and a healthy plant. This is especially true of monkey grass and many so-called value stocks. That's why it is important to really understand your plants/stocks. Is the price of a stock declining because of a previously unknown fundamental problem at the company? Or is the market emotionally overreacting? If you can't tell the difference, you might dig up some expensive flora your spouse loves.
Weeding is hard work. It's not fun. Weeding your portfolio forces you to acknowledge your mistakes. Weeding your yard forces you to your hands and knees. Both are humbling.
After the hard work, however, the end result is outstanding. In your landscaped bed, you can more clearly see your flowers and other plants. The remaining healthy plants don't have to compete with the weeds for nutrients, good soil, sunlight or water. In your portfolio, you no longer have a bunch of dangling financial participles dragging down your investment return. That capital is available to invest in potentially more attractive investments. Remember, you don't have to earn your money back the same way you lost it.
Of the several flowerbeds around our house, one of them lacked the nice crest of the others. It had more weeds, less mulch and the plants seemed to be a bit out of control. This bed clearly required more attention. It was also the only bed in the entire yard that my wife and I built ourselves, including killing the grass, mounding the topsoil, planting the plants and spreading the mulch. The beds built by the professional landscapers we hired were clearly superior.
For many people, the investment metaphor holds true in this regard, too. 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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