News is not cause for concern about future market direction

By DAVID MOON, Moon Capital Management, LLC
June 19, 2011

When the Dow Jones Industrial Average dropped below 12,000 two weeks ago, the investment pundits did what they always do: repeatedly state the obvious. Most of them focused on the overall market extending its longest weekly losing streak since the fall of 2002. Few put that observation into any rational, meaningful context, however.

By itself, news of the market's sixth straight week of declines is no cause for specific concern or conclusions about the future direction of the market. It is merely a report of the market's recent past.

It might even be interpreted as a positive sign. Here’s a little history lesson.

On October 8, 2002, the Dow Jones Industrial Average reached a bottom of 7,501, completing a 36 percent decline. That began a little more than two-and-a-half years earlier when the Dow was at 11,722.

As the market was reaching its bottom in the fall of 2002, investor panic was nearing a crescendo. The same investors who, at the market peak in January 2000, were pouring money into stocks were selling those same stocks at the market bottom.

They were convinced stock prices were headed lower – and they panicked.

It was irrational exuberance, followed by unfounded pessimism. Buy high; sell low.

Are we experiencing the same situation now? I don't know, but I do have a little anecdotal evidence that helps keep me from panicking.

I've always suggested that it is impossible to predict short-term movements in the stock market. That may not be true. I have a client who, it seems, can predict when the market is about to change directions.

When he panics and wants to sell, it is almost always time to buy.

He is currently panicking.

Another interesting observation from the past 25 years in this business is that many people want to make changes as the market bottoms. When stock prices decline, investors often feel as if they ought do something. Anything.

One of the things they do is change investment advisors.

We certainly don't mind accepting new clients. Almost any time someone is interested in hiring us, we're happy to oblige them. Some times, however, they want to hire us for the wrong reason.

Although they don’t consider it this way, some people hire us in troublesome times simply because they believe that by doing something, they may change the direction of the market or, at least, the direction of their net worth.

We get a lot more of these calls at market bottoms than we do at market tops.

It's sort of like changing from the orange Tennessee hat to the white Tennessee hat when the Vols fall behind in a game. You feel like taking action, even if you really don’t have any rational reason to believe it will make a difference.

The only history that catches the attention of most people is recent history. Farmers have learned a lesson that continues to escape most investors: just because it rained yesterday doesn't mean that it is going to rain today.

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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