By DAVID MOON, Moon Capital Management,
April 27, 2008
I'm a bit
embarrassed to admit it, but when I run across that new ultimate fighting
'sport' on television, I occasionally stop and watch.
The guys who win in those fights are tough. Getting
repeatedly punched in the face has no impact on them. The only time they quit is
when their opponent is about to break their arm or cut off oxygen flow to their
If you're invested in stocks, you've probably felt like you've been punched in
the face the last few months.
But like those crazed cable television fighters, investors have to be able to
distinguish between a bloody nose and a broken arm.
Nathan Rothschild, said to be the wealthiest man in the world in the early 19th
century, advised that 'the time to buy is when blood is running in the
There's no record if Rothschild made any recommendations about broken
Rothschild certainly understood that there is a difference between price
movements ' especially in the short term ' and investment opportunities.
Investors are currently so fixated on housing, debt, recession and energy prices
that many of them can't fathom that stock prices will ever recover.
People typically panic after stock prices have declined significantly. A sense
of relief doesn't set in until after prices recover, and that usually doesn't
occur until well after a recovery in the underlying economic fundamentals.
Remember, the stock market moves on expectations.
This past week, the March existing-home sales figures were released, revealing a
2% decline from February and a 19% drop from a year earlier. Almost 10 months'
worth of unsold homes are still on the market. Foreclosures continue to
increase. California foreclosures are up 327% from a
Housing remains in a funk.
Let's look at the stock market. Prices are down this year, significantly
so in some sectors. Guess what one of the best-performing groups of stocks is in
Shares of homebuilders.
Surprised? The three largest homebuilders, DR Horton, Toll Brothers, and Pulte,
have increased an average of 24.4% percent this year. Beazer, one of the most
leveraged builders, is up 37% this year, and up 104% from its January 9
Of course, they are each still significantly below their
highs of 2007, but in the first three months of this year you would have made
money being invested in one of the most beleaguered of U.S.
The big money is only the big money, not necessarily the smart money. But the
big money clearly thought that the housing stocks were way too cheap in December
last year. After those stocks had already declined 50% or 70%, it didn't make
sense to panic. Investors needed to evaluate those companies based on their
future prospects, compared to the then-current prices.
The homebuilders were among the first stocks to begin to decline last year.
Perhaps they will also lead the market when it ultimately recovers.
And it will recover.
It's too late to panic. And it's too early to panic. It always
David Moon is president of Moon Capital Management, a
Knoxville-based investment management firm. This article
originally appeared in the News Sentinel (Knoxville, TN).