Chinese menu investing

By DAVID MOON, Moon Capital Management
April 22, 2007

Look in your closet. If you're a man, you might have a suit, a pair of blue jeans, a sweater, a few different types of shirts, a pair of shorts, some swim trunks and a winter coat.

There might be some boots, sandals, tennis shoes and dress shoes. You might even own a tuxedo and a dirty baseball cap.

Why? Because at the right time and in the right place, each of these items is proper.

However, can you imagine going to a party, not certain about the appropriate attire, and deciding to wear a pair of boots, a bathing suit, a sweatshirt, a cummerbund, a sports coat and a cowboy hat ' just to make sure that you wore something that was appropriate?

Think about that the next time someone tells you that your portfolio needs a little something from each rack in the investment 'closet,' just to make sure you always own whatever type of fund or style happens to be in style this year.

It's a silly way to dress and, despite its popularity, it's certainly not the best way to invest.

It is not uncommon for a portfolio to contain seven, ten or even more mutual funds. Large-cap growth. Small-cap value. Mid-cap growth at a reasonable price. Short-term bonds. Long bonds. International. Micro-cap Eastern European soda bottling company funds.

If an investor owns stocks rather than mutual funds, he may fixate on owning every possible economic sector ' just to be safe. Utilities, telecom, consumer discretionary, durable goods.

We just learned that Warren Buffett has purchased significant positions in three railroad companies, including more than $3 billion worth of Burlington Northern Santa Fe. Do you think he woke up one morning, suddenly realized he was underweighted in transportation stocks, and rushed out to buy three train companies?

No, of course not. Successful investors buy what they think is attractive, not what they think is attractive within every possible category.

This difference in investment approach goes much deeper than something learned in business school. It is a difference in a person's mindset.

The successful investor has the confidence to make a decision and a meaningful commitment; the over-diversifier strives not to be too different from everyone else.

The 'Chinese menu investor' takes one from column A, one from column B, one from column C, etc. At his core, he really believes that it isn't possible to identify a single attractive investment.

He might be able to pick a good large-cap growth fund or a well-run retail company, but can he determine whether or not the growth fund or retail company is trading at an attractive price today?

Probably not, or he would.

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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