Are you investing like a backyard quaterback?

By DAVID MOON, Moon Capital Management, LLC
March 2, 2008


Have you ever noticed that when Peyton Manning throws a pass there is seldom anyone in the area where the ball is headed? I think we can agree he's not a bad quarterback. Despite throwing the ball to empty areas on the field, he has still managed to complete almost 65 percent of his passes during his 10 years in the NFL.

He doesn't throw the ball to where his receivers are. He throws the ball to where his receivers are going to be.

When we were kids, whether in the backyard or in high school, most of us waited until we thought our buddy was open before we threw the ball. Good players anticipate. They don't predict; they have high confidence in what their teammates will do. And the great players have high confidence in what the opposing players are going to do, too.

When John Madden explains it on television, showing the ball on its way long before the receiver makes his cut to the ball, it makes perfect and simple sense. Heck, I could do that, if my shoulder wasn't so sore from lifting those printer cartridges at the office last week.

So why do people invest like backyard quarterbacks?

On Tuesday this past week, two top residential real estate measures indicated an acceleration in the decline of home prices. The S&P/Case-Shiller National Home Price-Index fell 8.90 percent in the fourth quarter. The median US home price declined more than $20,000 in the last year. The Office of Federal Housing Enterprise Oversight Index declined for the first time ever. It tracks the prices of homes purchased with Fannie Mae or Freddie Mac backed mortgages.

December's home sales dropped to a pace that is 23.4 percent lower than a year ago. The National Association of Realtors described the decline as 'a slip.'

And the sinking of the Titanic was a boating mishap.

I can hear the chorus of many investors. 'All of this news looks pretty bad for the housing industry. I sure wouldn't want to be anywhere near that industry. I should probably wait until the industry begins to show a rebound, then I might consider investing in that sector.'

Guess what else happened this past week?

The homebuilder's stocks are setting highs for the year.

The homebuilders ETF has increased more than 30 percent from its January lows. Individual companies like Toll Brothers and Lennar have increased more than 40 percent in the last month.

While their prices are still well below their highs of 2005, there are obviously enough investors with enough confidence in the industry that they aren't waiting until the fundamentals of the industry improve before buying the stocks.

They are throwing the ball before their receiver makes his cut.

Only time will tell if this increase in the price of homebuilders' stocks is a permanent one or not. But in the short-term, it helps to prove a point. If a piece of information is in the newspaper, it's probably already in the stock price. Great investments occur when people know the routes their receivers are running ' and they aren't afraid to throw the ball early.

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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