Don't fear recessions, ogres or Candy

By DAVID MOON, Moon Capital Management
February 24, 2008


When Franklin Roosevelt said that we had nothing to fear except fear itself, did he mean that fear was the most frightful thing, or that fear was the only thing that could hurt us, or that we should reject the fear of everything except fear ' which would mean rejecting the fear of everything?

I don't know. But I do know that most of the things we're afraid of never happen. After taking my kids to see 'The Spiderwick Chronicles' last weekend, they were convinced that an enormous horned ogre would sneak into their rooms and attack them. Guess what? No ogre.

For years I've had this recurring nightmare about John Candy at a water park in a Speedo. Even after he died.

And some of you are afraid of a recession.

You're afraid that a recession might wreak havoc on your stock portfolio, so you're rushing to sell stocks to protect yourself.

Wouldn't it have been nice to have done that about a year ago?

Recessions are like termites. By the time we realize we have one, it's already been here for a while. When the government declares that a recession is actually taking place, it's been occurring for more than six months. In fact, sometimes by the time we realize that we're in a recession, the recession is actually over. That happened in the 2001 recession.

So why don't investors pick up on signals of impending recessions, so we'll know when to pull money out of stocks?

Despite what someone may want you to believe, it's not really possible. Paul Samuelson, America's first Nobel Prize winner in economics, once said, 'The stock market has predicted nine of the last five recessions.' In other words, Wall Street worries much more than it should ' it needs a good dose of Roosevelt.

Stocks don't always decline during recessions. We've had four recessions since 1975. The market increased in half of those recessions.

Most of the declines occur when the U.S. economy is not in a recession. Read that last sentence again. The recessionary status of the U.S. economy is not an accurate predictor of whether or not stock prices are likely to decline, increase or wobble along sideways.

Your returns are much more likely to be correlated with the prices you pay for your investments than a prediction about the short-term changes in economic output. Heck, most people can't even define 'economic output.'

Legendary mutual-fund manager Peter Lynch was right: If you spend more than 30 minutes a year trying to predict the economy, you've wasted your time. You would have done better watching an episode of 'Gilligan's Island.'

Don't fear the big bad wolf. Like John Candy and the horned ogre, it isn't coming.

And don't fear recessions. You don't know when they're coming. If you did, you wouldn't know what to do about it. And by the time you know they're here, they've already been here for a while and may even be on the way out.

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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