Concentrate on price rather than news

By DAVID MOON, Moon Capital Management, LLC
January 8, 2012

As you plan your investment strategy for the year, pull out your crystal ball. Who will the republicans select to run against President Obama? Which candidate will win in November? Will unemployment be over or under nine percent? What will happen in Iran? Who will win the Super Bowl?

Surprise: it really doesn’t matter.

Imagine that a year ago you had known that in 2011 the US government debt would be downgraded below the credit rating of Singapore, Germany and Canada; the US would face two debt limit crises; unemployment would remain mired around nine percent; stocks in China, Brazil, Germany, and Japan would decline more than 16 percent; housing prices would continue to fall; Iran would make direct threats against US aircraft carriers in the Persian Gulf; and the Federal Reserve would indicate that it may take two or more years for employment to recover.

If you had known with certainty that these things were going to happen in 2011, wouldn’t you have predicted a loss for the S&P 500? Instead, the market was flat.

Yet these are the kinds of things investors and advisors talk about. They dominate the evening news. When someone writes Brian Williams’ script explaining why the Dow Jones Industrial Average rises or drops tomorrow, these are the kinds of explanations they use.


Because they are simple. They are common. They are easy. Drawing conclusions or forming opinions about them requires no special expertise or knowledge. The security guard in my building can tell you where terrorists are likely to attack next and how that is going to impact the stock market.

He should work for TSA. Or maybe I should hire him.

These explanations also give people, including professionals, a false sense of being able to predict the stock market.

None of those people, including Brian Williams or our security guard, can tell you what is happening to the operating margins at AT&T or if Dell Computer is priced cheaply or expensively relatively to its net assets.

People concentrate on things they understand, not necessarily things that are important.

It happens in the investment profession, as well.

Wall Street analysts are famous for knowing the price of everything but the value of nothing. A typical research report will tell you every financial ratio about a company over the past ten years, make projections about the next ten years, then conclude with a ‘buy” recommendation. Regardless of the analysis, only five percent of Wall Street analysts recommend selling the stocks they cover.

The key to making money in the stock market is a lot like making money buying and selling real estate, farm equipment or any asset: you must purchase the asset at a good price. If you can buy beachfront property in Hilton Head at $5,000 per waterfront foot, I wouldn’t worry too much about unemployment or Ron Paul. Time is on your side, as long as you don’t use borrowed money.

Concentrate on the price you pay for things. Almost everything else is noise.

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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