Investing in delicasies not wise

By DAVID MOON, Moon Capital Management, LLC
August 24, 2008

In the investment industry, funds, annuities, bonds, stocks, CDs or any other type of vehicle an investor might purchase are called 'products.' Like new automobile models, investment firms are constantly creating new products.

How do they choose what types of products to create this month or quarter or year? Often the choice is based on the types of investments that have most recently experienced a significant price increase.

At first that may seem counterintuitive. Why would you want to put money in something that has already run up in price? But people do it all the time. And investment firms know it.

That's why the products many are most likely to favor are the ones that are selling at the least attractive prices. Human nature makes those products the easiest ones to sell.

It's a lot tougher to sell a fund invested in bank stocks these days than one that guarantees a four percent annual return.

Five years from now, which do you think folks will wish they had owned?

When stock prices reach inflection points, either negative or positive, people do weird things. They chase rabbits they can never catch. They close barn doors after the cows have escaped.

Neither of which prevents them from being killed by a raging bear.

In the last couple of weeks, I've seen examples of the latest in weirdness. Did you know that the Live-ex 100 increased 9% in the first half of 2008, after gaining a whopping 42.2% last year?

The Live-ex 100 is the London International Vintners Exchange Fine Wine Index.

Simon & Schuster, presumably a reputable book publisher, is actually selling a book titled 'Investing in Liquid Assets: Uncorking Profits in Today's Global Wine Markets.'

Burp.

The author, who shall remain nameless to deny him the publicity he obviously so badly wants, compares wine to shares of Google stock ' except people drink wine. 'Imagine what a share of Google would be worth if every night there was less of it.'

Of course, I could make the same argument for Vienna sausages. A study conducted by Burt Peake indicates that the price of a can of those delicacies has increased more than 9% this year. Sell your mutual funds. Liquidate your Bordeaux. Load up on imitation meat by-product wieners.

Maybe we should start a fund that just invests in processed meats. If CNBC would publicize the bull market in weenies, I bet we could raise millions.

Another article from the last week suggested that financial advisers weren't taking classic art into account when analyzing their clients' portfolios.

I wonder if that includes the velvet-canvas painting of dogs playing poker?

The value of an investment is a function of the cash that investment generates for its owner. Period.

The market misevaluates those cash flows sometimes. But don't let inflection points chase you into an asset class whose time has already passed or ignore one that may be unfavored, but very attractive.

And certainly don't stagger into 'investing' in Vienna sausages ' or more extravagant edible or potable asset classes.

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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