The Investment Tao of Leaf Blowers

By DAVID MOON, Moon Capital Management
August 19, 2007

It may be hard to believe, but there was an incident in my life when my wife got angry at me. Yes, sweet, even-tempered, lovable me. In 22 years of marriage, I suppose it will happen. I thought she was going to divorce me, or shoot me, or maybe hit me in the head with a shovel.

I've forgotten all of the details, but she was angry about something having to do with a broken leaf blower, or some similarly silly lawn tool. We were on the back porch, yelling at each other over a weed whacker.

You understand, of course, that I was completely blameless in this little episode. Absolutely. 100 percent.

Well, not really. And, as it turns out, our fight had nothing to do with two-stroke engines. She was really angry about something completely different ' something to which I shall not confess in writing.

But as it turns out, she was right to be mad at me; she was just yelling about the wrong thing.

Sometimes the right thing happens for the wrong reason.

In 2000, the US stock market began our generation's meltdown. Do you recall the needle that burst the bubble? Even when Alan Greenspan declared that stock prices were too high four years earlier, investors hardly noticed. It took a legal case against computer giant Microsoft for investors to begin a multi-year correction from levels of irrational exuberance.

So does this have any relevancy to more recent swings in stock prices?

Yes, because there is a corollary to the 'right thing for the wrong reason' axiom: sometimes the wrong thing can happen for the right reason.

Look no further than the recent fallout from the mess in the mortgage market for a sub-prime example.

Once investors get skittish (a technical investing term), it takes very little to cause them to panic.

To paraphrase Yogi Berra, if nobody wants to buy stocks, you can't stop them.

But when they don't, it can create opportunity.

There are problems in the mortgage markets. Lenders have made all sorts of crazy loans to people who will default. Just as sure as God made little green apples, you can count on this. There will be ripple effects throughout many segments of the economy. This is the right thing.

But in the last 15 trading days, the market capitalization of Microsoft fell more than $25 billion. What does this have to do with sub-prime mortgages? Cadbury Schweppes' price has fallen 20 percent since June. Has the value of Cadbury really declined $4 billion? Are people going to cut back on Dr. Pepper and Hawaiian Punch as a result of higher mortgage payments? I can understand mortgage loans or maybe houses, but what about Happy Meals? McDonald's stock declined almost ten percent in three weeks.

It's a baby with the bathwater mentality.

Just like my wife, it's hard to explain why stock prices sometimes do the things they do. The key to success, however, is to determine the real reason behind any price movement ' if any ' and make your decisions accordingly. It works with leaf blowers; it works with stocks.

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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