By DAVID MOON, Moon Capital Management
As investors, we often focus on the
wrong things. The important things are often hard, so we focus instead on things
that are easier to understand, even if they're not particularly
We also tend to overemphasize the
most recently received data.
At the peak of the Japanese market in 1989, 14 percent of the investors
in Japan predicted a crash in their
stock market. After it crashed, that percentage increased to 32 percent, even
though the odds of another crash had declined as a result of the already lower
In the face of
everything logical, people were most influenced by the thing they had seen most
No wonder companies spend so much money on advertising messages. Perhaps
the last ad we see before leaving the house will influence our purchases that
We also focus on the things that are popular. It's a lot easier to accept
being wrong if our poor stock pick is a well-known, widely owned company rather
than the target of constant criticism on CNBC.
least if we're wrong, we have a lot of company. And we've all been told since we
were children that "there's safety in numbers."
were also told there was a Tooth Fairy and an Easter Bunny.
A fear of being different leads to an investment portfolio influenced by
consultants, television commentators, magazine covers and tips passed along at
the barber shop. It also leads to, at best, mediocre
many investors focus on what is personal.
A study split participants into two
groups. Members of each group were issued a playing card from a deck, after
which the researchers attempted to purchase the card from the
The only difference between the two
groups was in how they were issued their cards.
The members of one group were each
handed a card. They had no choice in the selection. The folks in the other group
were allowed to thumb through the deck and select their own card. Then the
moderator tried to buy each of the cards back from the participants.
The group that had selected its own
cards held out for more money ' four times as much, in fact. Presumably they had
an irrational sense of 'ownership' in the card simply because they had selected
They touched it; they chose it.
That's why it was so much more difficult for them to part with it.
All of these tendencies are common,
easy ' and 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).