Independent thinkers need not apply

By DAVID MOON, Moon Capital Management, LLC
July 13, 2008

Three months ago, 42 percent of money managers surveyed by Russell Investments believed U.S. stocks were attractive. After the Dow Jones Industrials declined 7.44 percent in 90 days, you might have expected some managers to find more stocks attractive.

Not so. The percentage of bullish investors dropped 10 percentage points, to 32 percent.

So much for the buy-low part of "buy low, sell high."

Three months ago, health care was the most popular sector, favored by 71 percent of the surveyed managers. After the S&P 500 Health Care sector declined 1.73 percent last quarter, only 54 percent are now bullish on the group.

Have you ever seen a school of fish swimming along together, and then all make a single change in course in unison? That's Wall Street.

Except that the managers on Wall Street get paid huge fees for their supposed independent thinking and insightful analysis.

Index funds typically charge low fees because they don't actually manage anything at all. These fund sponsors readily admit mimicking someone else's stock picks.

But plenty of other advisers and fund managers mimic other investors without admitting it − either to their clients, themselves, or both. Perhaps they think they are making independent rational decisions when their emotions are actually in charge.

Emotions impel some irrational things, like trying not to be different, not to stand out from the crowd.

Even if you agreed with the process of the herd-like managers highlighted in the Russell survey, it would be difficult to actually implement their advice. They don't like stocks. More of them are bearish.

What's more, fewer of them like Treasury bonds than 3 months ago.

So if you sell your stocks and bonds, where should you put the proceeds? Only 24 percent of the surveyed managers favored cash, a decline of 22 percent from the first quarter.

Oil futures? What investments are left?

In late June, the Wall Street Journal headlined a story on the Russell survey "Money Managers Turn Bearish." That hardly seemed like news, since June was the worst month for stocks since September 2000.

The survey detailed changes in investor expectations about a number of different asset classes and sectors.

The article didn't reveal, however, that the easiest way to predict institutional expectations about a particular asset class was simply to take recent changes and extrapolate them.

The 335 professionals interviewed didn't appear terribly sophisticated in their forecasting techniques. If something had gone down recently, more of them expected it to continue to go down. Same thing if it had gone up.

Make room on the bandwagon, please.

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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