By DAVID MOON, Moon Capital Management
Someone recently showed me a letter from an investment
consultant about diversification. The letter noted that various investment
styles go in and out of favor, so prudent investors always have some of their
money committed to multiple styles, just to be safe.
To help prove the point, the letter was accompanied by an
impressive chart. I knew it was impressive because it was in color and had
pictures and words that were so small that I needed a magnifying glass to read
The impressive letter that was accompanied by the
impressive color chart said, in part: '[S]tock groups go in and out of favor
without much logic or warning,' and that's why diversification is so important.
This firm recommended that the foundation it was
discussing expand its list of investment managers to include experts in a bunch
more investment styles.
For a fee, you can hire this consultant to manage all of
the managers you need to hire in order to be 'properly
But hold on.
To evaluate the statement about stock groups going in and
out of favor, you must first define what a 'stock group' is. It's pretty easy to
differentiate between a large- and a mid-cap stock, but is there such a thing as
a group of 'value stocks' or 'growth stocks?'
Sure, lists exist, but I wish someone could give me the
ultimate list, so I could know where to look for investment
The terms 'value' and 'growth' mean whatever a particular
investor chooses for them to mean ' or whatever a consultant tells you they
mean. And for a fee, I know a consultant you can hire to provide definitions of
these terms and select managers to fit into each of those
The impressive letter was correct about shifts in market
dynamics occurring without much warning. But that's not the same as saying that
these shifts are without logic.
Most inflection points in the market are the result of
perfect logic ' that is, investors are correcting previous valuation
Why do large-cap stocks sometimes outperform small-cap
stocks over long periods? Almost certainly it's because companies that comprise
the large-cap group are inexpensively priced relative to companies in the
Market changes can ' and do - occur without warning and
often in reaction to irrational triggers. But the underlying cause is that some
stocks are simply more attractively priced than others ' and price eventually
Sometimes small caps are cheaper. Sometimes large caps
are. Sometimes it's foreign stocks. Although plenty of people profess to be able
to predict these inflection points, I've never seen anyone consistently do it.
I have, however, seen people who have consistently
recognized the conditions necessary for a stock group to move in or out of
favor. It's a function of price and value.
Some find it comforting to own what's in favor. I would
much rather always own what is attractively
David Moon is president of Moon Capital Management, a
Knoxville-based investment management firm. This article
originally appeared in the News Sentinel (Knoxville, TN).