Older information gets discarded by some investors

By DAVID MOON, Moon Capital Management, LLC
April 12, 2009


In April 2008, a Rasmussen survey found that 73 percent of Americans believed that global warming was at least a somewhat serious problem. In January 2009, only nine months later, they conducted the same poll, asked the same questions and used the same sampling techniques. The percentage had fallen to 64 percent.

No new scientific discoveries had been made during those nine months. Al Gore did not announce that he had only been kidding about the weather nor did he give back his Nobel Peace Prize.

The pollsters concluded that American opinion shifted so much in a brief period because it was unusually cold in the few weeks just before the poll was taken..

There was also a lot of snow. More than 2,000 daily snowfall records were broken in December 2008.

Just 15 days after the end of this arctic blast, Rasmussen asked people what they thought of global warming. The pollsters probably called just as homeowners were writing checks to pay huge December heating bills, or while the kids were in the front yard sledding.

What did you expect them say?

Psychologists tell us that humans tend to give more credence to information that is new, rather than data that was received in the past, even if the older data is much more important.

This is why investors are fascinated with quarterly earnings reports and the weekly sales reports from retailers. It is why two or three days of consecutive positive (or negative) returns for the Dow Jones Industrial Average can completely change the sentiment of the anchors on CNBC.

It is also why investors are so quick to extrapolate the most recent returns of a stock or stock index, irrespective of the current condition of that stock or index in a broad historic context.

This trend toward shorter-term thinking has implications much more important – at least for our specific purposes – than public perception of global warming. It affects our wealth.

Sixty years ago, investing was primarily an individual avocation. People picked stocks. Individuals owned 92 percent of all U.S. domestic stocks in 1950.

Today, that relationship has reversed. Institutions own 75 percent of all U.S. stocks. The dynamics and motivations of individual vs. institutional investors are much different

If you need any evidence that institutions are much shorter-term thinkers than individuals, look at the change in the annual turnover rates since institutions have begun to dominate the investment landscape. In the quaint days of 1950, when individuals dominated stock picking, annual turnover in stock holdings was approximately 30 percent. It is now about 300 percent.

The average holding period for the typical investor today is only four months. Of course, the typical investor today isn’t investing his own money. He is investing for an unseen and unknown client, perhaps one of a hundred thousand account numbers or a pension fund board of directors – each ready and willing to fire the manager and replace him with last quarter’s best performer.

It is not a recipe for long-term thinking.

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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