Following what "They" say

By DAVID MOON, Moon Capital Management, LLC
September 13, 2009

After an intense, multi-year study about market behavior, prognostications, forecasts and unexpected outcomes, we have found the seer who knows all - the forecaster who is seldom, if ever wrong.

It is the “They Committee.”

“They” must be the experts. Every day, someone approaches me and says something like, “you know, They say interest rates are going down. I better buy some of those 100-year General Motors bonds.” Or, “I heard They said the market had peaked.” Sometimes the They Committee is pondered as a resource: “What do They think about Acme Amalgamated? Is it going up?”

This They Committee must know everything or they would not keep being quoted as a source.

If you are going to use They as a resource, be careful. They change.

In 1987, Elaine Garzarelli became a household name (well, in some peoples’ houses) after she “predicted” the October stock market crash just days before it happened. She became a star. For some time afterward, the They Committee was replaced by “She.” “Well, what does She think?” “She is getting her own mutual fund. Let’s send She some money.”

The only problem was that she continued to predict financial Armageddon, even as the Dow Jones Industrial Average quickly and permanently recovered. Her position on the They Committee became so precarious that a decade following her hey-day as a member of the They Committee she was blamed for causing a market downturn one day by announcing that She had finally turned bullish on the stock market.

If Elaine Garzarelli, the perennial bear since the Dow was 1,800, had finally turned bullish, it must be time to sell.

You can find a professional to predict anything you want to hear. Today, there are investment folks who are calling for the Dow to increase exactly 2.1 percent next week and those who believe it will decline 20 percent in the next six months.

One of them may be right. But that does not have any predictive value about their next forecast.

If you are going to have a They Committee, be sure and consider the members’ philosophy and discipline. There are plenty of folks who are glad to tell you what is about to happen. There are fewer who can reasonably explain the basis for their predictions.

Even fewer can offer explanations that make sense.

And still fewer who remain disciplined to their process.

More important than the person or people implementing the process is the actual process itself. To paraphrase Warren Buffett, “when quality people implement a horrible investment strategy, it is usually the reputation of the strategy which remains intact.”

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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