Will you look forward or backward?

By DAVID MOON, Moon Capital Management
December 30, 2007


My sole New Year's wish for everyone in 2008 is a simple one: that you not be stupid.

Pretty straightforward. It's also my resolution for me this year, so I don't feel arrogant sharing it with you. There is certainly plenty enough stupidity to share. Maybe an extra dose or two of wisdom isn't too much to hope for.

If you think I'm too cynical, look no further than the way people react with their investments toward the end of each year and into January. They make the perfect decisions ' for the previous year. Bill Miller's Legg Mason Value Trust had outperformed the S&P 500 for 15 straight years until 2006. Investors have withdrawn a net of $1.39 billion from the fund this year. So much for fighting the last war.

Ask Bill Nasgovitz, legendary manager of the Heartland Value Fund, about fickle shareholders. In 1999, after Heartland Value had trailed the market averages for two consecutive years, many of his shareholders lost confidence in his skill. They believed that perhaps times had passed him by.

The skeptics included his own mother. He managed to convince his mother to keep her money in his fund, but wasn't so successful with his son. Young Will Nasgovitz fired his dad and put his money in an index fund.

Over the next seven years, Nasgovitz' fund increased 183 percent. The Vanguard Index 500 increased 7.39 percent.

I'm sure Momma is proud of her boy. And I bet Will added another lesson to that list of things that his father tried to teach him but he just had to learn on his own. Experience is a harsh teacher.

People are great at solving old problems. Farmers call it closing the barn door after the cow has escaped. All that does is prevent the cow from getting back into the barn.

In his book 'The Black Swan: The Impact of the Highly Improbable,' Nassim Nicholas Taleb examines this strange human phenomenon. After the tragic events of 9/11, what did authorities do? They instituted a series of security measures that practically ensure that a group of 23-year-old Middle Eastern men won't highjack Boeing airliners with box cutters and fly them into skyscrapers in New York City. Problem solved. When Richard Reid tried to light a shoe bomb on a flight from Paris to Miami three months later, we all began walking through airport security barefoot.

Thank goodness Reid didn't put the bomb in his boxers.

About the same time that Bill Nasgovitz was struggling to keep the confidence of his family, commentators were speculating that Warren Buffett had lost his touch. Perhaps the game had passed him by. Berkshire Hathaway shares had declined almost 30 percent in the previous two years, while the S&P 500 was climbing to new highs. Maybe things had changed. Berkshire shares have tripled since then.

In a few days, millions of year-end investment statements will begin arriving in the mail. For some investors, it may be the only time they review the performance status of their accounts. Will you look backward or forward?

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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