Value in revisiting obvious truths when investing

By DAVID MOON, Moon Capital Management, LLC
September 11, 2011

The Commission on Wartime Contracting in Iraq and Afghanistan, a congressional group first convened in 2008, recently released a report on the fiscal details of US wartime contracting over the past decade. This may come as a shock to you, but after extensive research, forensic accounting and related analysis, the group found that there is waste in military contracting.

The bi-partisan group reports that wasteful spending ranged between 10 and 20 percent of total contract spending. Outright fraud totaled another 5 to 9 percent.

Shocker.

The only real shock is that the topic was in doubt enough to warrant a three-year study. The report reminds us, however, that there is value in revisiting of known truths like this.

The same is true in investing. It is useful to occasionally remind ourselves of the obvious.

Most people acknowledge that it is impossible to consistently time the stock market, yet it doesn’t stop many folks from trying. We don’t even need a congressional panel to issue a report; there are hundreds of existing studies detailing the futility of trying to guess the direction of the next 500 point Dow move.

It can’t regularly be done.

Another obvious truth in investing that many people overlook is the power of self interest and experience. That should be evident, of course, but it doesn’t preclude many people from trusting their money to newly minted investment advisors or those who have never seriously analyzed an investment themselves. Childless couples seldom offer practical parenting advice. Be skeptical of advisers and promoters who don’t put substantial amounts of their own money where their mouths are. A new business card, fancy brochure and nice suit are no substitutes for experience.

It’s easy to say that if you don’t understand something you shouldn’t invest in it, but saying it doesn’t dissuade people from repeating the mistake. You will have more long-term investing success if you stick within your areas of competency. Winning a slot machine jackpot doesn’t automatically qualify you as an expert on statistics or vending machine construction. Getting lucky on a biotech stock doesn’t make you an expert on genetics.

Most people intellectually realize that so-called cataclysmic economic events seldom are, yet that doesn’t keep them from fearing the worst after every financial shock. Despite the forecasts of scores of (inexplicably) well-respected economists, the 9/11 attacks did not result in a decade of economic calamity.

It may seem intellectually obvious that a decision to hold a stock is the same as a decision to buy it, but most people don’t act that way. There really is no such thing as “hold.” If you wouldn’t buy a particular stock today, at today’s price, is there any reason you should continue to hold it? If you do not sell a stock, you are making the repeated decision to buy it.

Investing can be like a three-year congressional study that merely reports the obvious. Just because something is obvious, however, doesn’t mean that it isn’t useful to be occasionally reminded of it.

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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