Downside to getting what you want

By DAVID MOON, Moon Capital Management, LLC
December 28, 2008

My son wanted a beagle for Christmas. Our yard isn't fenced, and beagles are apt to roam off. They aren't the easiest animals to housebreak. And they make a loud ambulance-ish sound when they howl ' which is often.

Had there been a beagle puppy under the tree Thursday morning, my son would have been thrilled. Until the next set of realities set in.

I explained the physics of my house and yard to Santa, in hopes he would consider a gift for my son that was a little less noisy.

He brought a drum set, instead.

Thanks, fatman.

Sometimes the worst thing that can happen is that you get what you want.

In 1981, Steven was convinced that the stock market was about to decline. The Dow Jones Industrial Average stood at 1,000, about the same place it was in 1976, 1972, 1968 and 1965. Steven was smart and could tell that there was apparently a force field that prevented the Dow from significantly exceeding 1,000.

He was just starting his working career, so he was accumulating cash fairly quickly. He held it in a money market fund because he was convinced the Dow would not penetrate the 1,000 level.

Lo and behold, he was right. Eighteen months later the market had declined more than 10 percent. But Steven knew the decline was only starting. The slide would continue.

Of course he knew; he was right with his first prediction, wasn't he?

Whoops. For the next five years, the market did nothing but increase. The DJIA climbed from 825 to almost 3,000. Steven began to question himself, especially now that his once meager savings had accumulated to become a fairly substantial sum.

In the summer of 1987, fearful that he had made a terrible mistake in avoiding the stock market, Steven put his retirement plan into stocks.

The Crash of 1987 occurred and Steven lost a third of his investment. Had he left his assets alone, however, they would have recovered within two years. But Steven was kicking himself for not taking his own advice, so he sold all of his stocks ' after being in the market a grand total of three months.

Sadly, like my son, the beagle and the drum set, this is a very true story.

There he sat, in cash, from October 1987 (DJIA 1,750) until January 2000 (DJIA 10,900.) He missed the greatest bull market of our generation, simply because he thought he could time the market.

In January 2000, Steven had an epiphany; it was time to get back into stocks.

I am not making this up.

Two months later, the stock market began a drop that eventually took the S&P 500 to an almost 50 percent decline.

Steven doesn't live around here any more, so I don't run into him and, consequently, I don't know when he sold his stocks in that cycle or when he bought them back.

I am sure about one thing, however: Steven doesn't own any stocks right now.

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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