By DAVID MOON, Moon Capital Management
Has your spouse ever become intensely
angry at you for some minor blunder you committed ' so much so that the response
was totally out of proportion to your trifling dereliction?
If your wife calls the police to your house because you leave your socks
on the floor or you put too much pepper in the chili, odds are that she's not
really upset about your sloppy housekeeping or culinary skills. More likely, you
did something to her parents or she's discovered the secret life you've been
living as the leader of cannibal cult or as a plaintiffs'
The stated reason is
often not the real reason.
The same is true in the
stock market. Remember that as stock prices react negatively to violence in the
In early 2000 a judge
ruled that Microsoft had used illegal, anti-competitive business practices to
crush Netscape's Internet browser. This ruling gave credence to earlier lawsuits
filed by the Justice Department and twenty states making similar allegations.
Rumors swirled that Microsoft would be broken into little
The stock declined 50
percent in less than four months.
This helped trigger a
three-year bear market in which tech stocks collapsed and many large, blue-chip
companies (such as Coca-Cola and Wal-Mart) fell to prices from which they still
What does the price of
Coca-Cola or Wal-Mart have to do with six-year-old threatened lawsuits against
Microsoft? Nothing. But their prices appeared to decline in reaction to the
Microsoft decline, although that wasn't the real reason.
The real reason was that
the prices of Coke and Wal-Mart were too high to begin with. Like your socks,
Microsoft was a convenient excuse that came along at the right (wrong?) time.
Relative to the
Microsoft news, Coke and Wal-Mart shares grossly overreacted ' again like your
spouse and the socks. But relative to the real underlying issue (your secret
life, the unreasonably high stock prices), those stocks reacted
The right thing happened
for the wrong reason.
After the Middle East
fighting erupted on July 12, the Dow Jones Industrial Average declined more than
100 points on each of the next three days. Newt Gingrich called the violence
'the early stages of World War III.' My guess is that we have just witnessed the
end of a rare period of relative peace in the midst of a multi-thousand-year
Either way, fighting in
Israel and Lebanon has little impact on the underlying value of Kimberly-Clark,
a company that makes, among many other things, toilet paper. Yet
Kimberly-Clark's shares fell on those initial three days, right along with the
rest of the market. My family's toilet paper usage suffered no similar
The question investors
have to answer is this: Is the right thing happening to stocks for the wrong
reason? Or is the wrong thing happening for the wrong reason? The answer will
tell you whether to buy or sell or hold.
David Moon is president of Moon Capital Management, a
Knoxville-based investment management firm. This article
originally appeared in the News Sentinel (Knoxville, TN).