Focal Points

By DAVID MOON, Moon Capital Management
May 6, 2007

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 helpful.

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 stock prices.

In the face of everything logical, people were most influenced by the thing they had seen most recently.

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 day.

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.

At 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."

We 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 performance.

Finally, 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 participants.

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 it themselves.

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).

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