Traders ignoring fundamentals

By DAVID MOON, Moon Capital Management, LLC
October 19, 2008

First we had the worst week in the 112-year history of the Dow Jones Industrial Average. The following week, the index turns around and has its single largest point gain, increasing almost 1,000 points in a single session.

The rollercoaster reminds me of a phrase an old teacher of mine used to use: 'Is we is, or is we ain't?'

The news has been full of commentary and reports about the various historic landmarks set in the last few weeks. But there is some history I've not seen reported in the last few days.

For 75 years, a week in February 1933 stood as the worst in the history of the U.S. stock market. Stocks declined 17.72 percent that month, almost all of which occurred in the last week.

A remarkable three-year bull run began the very next month. Stocks increased almost 100 percent in the subsequent 12 months. Many investors, however, were still fearful. They had been teased the previous year when prices increased 38 percent in July 1932, then another 38 percent in August ' only to finish in negative territory for the entire year.

When the market collapsed again in February 1933, they felt their fears were validated. Worried investors remained on the sidelines. They missed that 100 percent recovery.

But then in 1934 ' the market declined again, this time only 1.34 percent, however. Newspaper accounts still discussed the possibility of a return to an October 1929-style collapse. Many investors were still skeptical of stocks.

They missed an 82 percent increase in the subsequent two years. They were waiting to get back into stocks. Waiting on something.

For the investors who were waiting for normalcy or for things to 'settle down,' the recovery came either too quickly or too quietly for them to get back into stocks.

As in 1933, today's stock traders are ignoring company fundamentals. Many stock prices are cheap ' some ridiculously so. Some aren't, but in many cases the attractive ones are being lumped together with those still overpriced.

I am not predicting that a massive bull market will begin next week or next month. That is the sort of action that causes people to look stupid and lose money. Stocks can remain inexpensive and attractive for long periods of time ' just as they can remain overpriced for similarly long stretches.

But the lessons of history are much easier to see in hindsight than while they are being experienced:

(1) Investors may ignore fundamentals for long periods, but prices eventually move to levels supported by earnings and asset values.

(2) You can't time the market. It is impossible to know when 'things have gotten better' until way after the fact.

(3) The stock market has been through periods like this before, and some investors thrived in the recovery.

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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