By DAVID MOON, Moon Capital Management,
July 6, 2008
A large brokerage firm
recently issued a research report that contained a startling
After analyzing the data, poring over his
spreadsheets and reading his tea leaves, the analyst concluded that the U.S.
stock market was likely to stay within a fairly narrow trading range over the
next several years ' possibly as long as eight
In other words, his forecast was that
stock returns might be as little as zero for most of the next
Had this been a call-in show, I might
have been tempted to pick up the phone and share my own predictions. Things like
an impending weakness in the residential real estate market or a decline in the
prices of bank stocks. I might even predict the demise of IdleAire or that
Archie Manning's sons would win back-to-back Super Bowl MVP
And I would have a whole bunch of
The guy calling for a flat stock market
took the last eight years' worth of data and simply predicted that it would
repeat. I thought I was listening to a history class rather than a discussion
about current investment strategy.
On January 10, 2000, the Dow Jones
Industrial Average closed at 11,723. In May the following year, it closed at
about 11,000. By September 2006, it was back to its original level of 11,700.
This past week, almost two years later, we were below
That's 8' years, and a total return from
capital appreciation of negative 2.76 percent.
In the interim, it has been as high as
14,000 and as low as 7,700.
Some mighty big and profitable companies
have fallen. Microsoft has declined from a high of $57 a share to $26.45.
General Electric is still 54 percent below its 2000 peak price. Home Depot has
declined 60 percent.
And these are profitable
After all this pain and spinning of
wheels, surely there are some lessons. There are always lessons.
The stock prices of profitable companies
can decline. There are plenty of reasons for this. Sometimes the price of the
stock is too high to begin with. Other times a stock price will decline in
sympathy with an overall market sell-off or negative news within a specific
industry. But just because a company is profitable and expects to remain so
doesn't guarantee that its stock price will increase from its present
Don't try to time the market. You've
heard it repeatedly. If you try, there are only two things that can happen.
If you fail, you will end up buying high
and selling low, which will cost you money.
Worse, however, you might succeed. Maybe
you'll manage to get out of stocks at a market peak or get in at a market
bottom. If so, you're likely to think you can do it again. That's like thinking
you're good at picking heads and tails. It's simply luck. Eventually you're
going to lose. And the longer you win, the more you're likely to bet on each
David Moon is president of Moon Capital Management, a
Knoxville-based investment management firm. This article
originally appeared in the News Sentinel (Knoxville, TN).