Don't use irrelevant information to make investment decisions

By DAVID MOON, Moon Capital Management, LLC
January 9, 2011

A January 2, 2011 headline from Investment News magazine read “2011’s Hot Commodities: Corn, metals, oil.”

It’s a shame that the headline wasn’t from a year earlier. During calendar year 2010 the price of corn increased 46 percent. The price of silver jumped a whopping 72 percent. Oil was up 22 percent.

The article described how these commodities should be expected to increase in 2011, based on their strength in the previous 12 months. Natural gas, which dropped 33 percent in 2010, should remain weak, an expert in the piece predicted.

There are two silly phenomenons at work here. One is emotional and the other is artificial.

If Tennessee and Florida are about to play each other in basketball Tuesday night and the only piece of information you have is that Tennessee won the regular season SEC championship in 2008, who would you predict would win? If the only data you use is a piece of completely unrelated historic information, your “prediction” would be nothing more than a guess. You might as well flip a coin. Yet many investors do the equivalent all the time.

It makes no difference what corn prices did last year. Corn doesn’t know that it’s 2011.

That’s why Will Rogers observed that a study of economics reveals that the best time to buy anything was usually last year.

This brings up the artificial nature of the decisions many investors will be making in the next few weeks, as their year-end statements arrive.

Why now? Because it’s January? Because you’re getting a statement? The beginning and ending of bull and bear markets don’t neatly coincide with the Rose Bowl Parade, yet that’s when many people pay the most attention to their fiscal health. And for some folks, it’s the only time they do it.

The mutual funds that attract the most new assets in February and March tend to be the best performing funds from the prior calendar year. Why not make the change in August, based on the nine month performance ending in July? That’s pretty easy data for most people to obtain these days, and it makes about as much sense as making a decision in January based solely on the prior 12 month performance.

We do the same thing in every area of our lives. Did you go to a gym this week? Why was it so packed? Because Pope Gregory XIII, when establishing the Gregorian calendar we now use, decided that the start/finish line for the earth’s annual lap around the sun would occur a couple of weeks after the winter solstice.

Why doesn’t everyone start their diets or begin exercising on April 15? Or change their 401(k) investment options on National Chocolate Éclair Day? Should you evaluate your Asian market funds on Chinese New Year?

The best performing group of S&P 500 stocks in 2010 was consumer discretionary companies. Expect to see and hear plenty of advice and counsel about this hot investment idea for 2011. And when you do, think of Will Rogers.

David Moon is president of Moon Capital Management, a Knoxville-based investment management firm. This article originally appeared in the News Sentinel (Knoxville, TN).

Click here to subscribe to MCM commentary.

MCM website