Financial world guilty of misinformation

By DAVID MOON, Moon Capital Management, LLC
March 11, 2012

One of the challenges in any endeavor is overcoming misinformation. The financial world is as guilty as any. Just because something is repeated enough times, however, doesn’t make it true. Let’s look at a number of common misconceptions.

For example, investors often assume that recessions and stock bear markets must coincide with each other. They don’t. In the past 80 years, the US has experienced 14 recessions. The Dow Jones Industrial Average increased during eight of them.

The federal government has spent more than $130 billion bailing out Fannie Mae and Freddie Mac. Contrary to popular belief, however, that money didn’t save a single homeowner from foreclosure. It prevented Fannie and Freddie from defaulting on loans, benefitting investors like China and the Federal Reserve, not your out-of-work neighbor.

Do almost half of Americans pay no taxes to the federal government? Only if you ignore Social Security and Medicare. That’s a bit like saying Ann Romney doesn’t have any cars – if you ignore her Cadillacs.

Despite what you’ve heard, the bailout of General Motors didn’t save one million jobs. According to SEC documents, only 91,000 people worked for GM in the US prior to the bailout. And the entire auto supplier industry only had 672,400 US workers prior to 2007, according to the Bureau of Labor Statistics.

Commentators talk about computers causing more rapid trading and bigger swings in prices, but the stock market is no more volatile today than a generation ago. In the past ten years, the stock market had a ten percent monthly price swing three percent of the time. In the previous 30 years, the market moved ten percent about 4.5 percent of the time.

Annual moves of greater than 20 percent were also less frequent in the most recent ten years compared to the prior 30. (People assume the market is more volatile because today there is immediate access to more information. It is the same reason people often assume that violence has increased when our era may have the least human violence of all time.)

People will disagree all day long, but Wal-Mart has not killed small retailing. Individual businesses are hurt when Wal-Mart and other big box retailers enter a new market, but small business continues to grow. The IRS reports that the number of sole proprietorships increased 56.4 percent from 1990 to 2007, which is greater than population growth (20 percent), real GDP growth (64.5 percent) and even the inflation-adjusted increase in the price of gold (54 percent.)

Many people assume a return to the gold standard would ensure monetary and political stability. Vacillating off and on the gold standard didn’t work so well for the German Weimar Republic, where hyperinflation and political extremism set the stage in 1933 for the appointment of Adolph Hitler as German Chancellor and the beginning of the Third Reich.

It’s pretty popular to hate big oil companies for not paying taxes – except that they pay plenty of taxes. ExxonMobil reported $31 billion in income tax expense last year.

Apple reported a total of $20.9 billion in income tax expense – in the past five years combined.

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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