Investors should think for themselves

By DAVID MOON, Moon Capital Management, LLC
January 16, 2011

A reader sent me an email last week suggesting that my column is little more than a billboard telling people that they shouldn’t try to make investment decisions on their own; they should hire me to do that instead.

While I certainly don’t mind people hiring our firm, this column encourages people to think for themselves. At times perhaps the messages are a bit subliminal, but successful investors are thinkers. They aren’t followers. They read more than they watch television. They are rational when others are emotional.

The letter writer wanted me to give some specific advice – not to be so obfuscating. I’m not going to tell you to buy H&R Block or sell Comcast (although I’ve done both in the past month), but here are some tools that might help you make some specific investment selections.

Avoid creating an expensive index fund or having a bunch of duplicate stocks in your mutual fund portfolio. If you own more than five diversified US stock funds that each own more than 100 stocks, there’s a very good chance that you’ve simply created your own mini (or even maxi) index fund. Alternately, you might think you are diversified but inadvertently have a large percentage of your portfolio in a single stock.

To test for these very common problems, use the Portfolio X-Ray feature at Morningstar.com. You have to be a Premium member to access this feature, but Morningstar offers a free 14-day trial so you can test your funds and see if you think the feature is worth it.

If you are going to buy any stock funds in your 401(k), take a second look at the funds that own fewer than 50 stocks. That alone doesn’t prove investment worthiness. But if the fund has a good track record and consistent manager, a concentrated portfolio suggests that the manager really understands and is committed to the stocks he owns. It’s enough to catch my eye. Like Facebook friends, the more stocks you have, the less you know about each of them.

Sell anything in your retirement plan that you wouldn’t buy today. Do the same thing in your personal account, especially if you have any unused loss carryforwards (which you probably do.)

If you plan to use some specific money within the next 12 months, put it in a CD or money market fund, regardless of how anemic the interest rate is.

Unless you have a specific targeted need in mind and fully understand the risks of long-term bonds and increasing interest rates, limit your bond fund purchases to those with average maturities of no longer than five years. Most people have never lived through an increasing interest rate environment.

Don’t buy anything that costs money to liquidate.

Most of all, think. Don’t feel. Think for yourself. But if you absolutely must listen to someone’s investment tip, put a small amount of money in a stock recommended by the smartest 13-year-old you know. They aren’t yet glued to CNBC or panicked about their own 401(k).

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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