Don't look back

By DAVID MOON, Moon Capital Management
February 4, 2007

By now, you should have received and reviewed all your year-end statements and taken account of your 2006 investment performance.

How did you do?

Now what are you going to do about it?

For many people, January is an arbitrary, yet popular, time to change investment allocations, managers and funds.

Usually, however, people are making decisions solely to generate activity. If they're dissatisfied they feel they have to do something ' anything.

Often they simply chase the previous year's winners. See how many of your fellow employees, disappointed with their 2006 return, move their money into the best performers of 2005.

Wal-Mart's stock price has been stagnant for seven years, but what does that have to do with the future of the stock? There aren't many places you can buy fresh sliced bologna and wheelbarrow tires at 3 a.m. And apparently there is demand for it, because Wal-Mart's earnings have more than doubled during that time.

What will the future hold for the stock price? I don't know, but it won't depend on the stock price's past.

The Legg Mason Value Trust outperformed the S&P 500 for 15 straight years ' until 2006. It has been managed by Bill Miller that entire time. Watch the first-quarter statistics; investors will withdraw money from the fund.

Miller didn't suddenly become stupid. People are just irrationally fascinated with the past ' and often the most recent past. What have you done for me lately?

Many investors look at a stock they've purchased and get frustrated that it's declined in price. But they won't sell it, thinking that they've not lost any money unless or until they sell it.

Instead, they decide to wait until the stock gets back to what they paid for it to sell it. Or maybe they're going to wait until they make a 10 percent profit before they bail out.

But the stock has no idea what anyone paid for it. It may never recover, much less provide a positive return. Or it might.

In one of the 'Back to the Future' movies, Doc Brown warned that unnecessary time travel only risks further disruption of the space-time continuum. That's what investors do when they spend all their effort looking in the rear-view mirror at 88 mph.

They're trying to get back to where they were. But they can't go back. It's not really even there any longer.

Even if a stock recovers to its purchase price, it doesn't happen in a vacuum. What else has happened on Wall Street while they waited? What might they have done with their money in the interim? Made more money? Lost it all? Spent it on an exotic vacation in Venice or Alabama? Things change.

And often, the only things that don't change are the things that should.

There are lessons to be learned from the past. But looking back is not only often irrelevant, it is sometimes downright dangerous.

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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