Feelings should not control decision to buy or sell

By DAVID MOON, Moon Capital Management, LLC
September 8, 2013

Syria is scary enough. But it seems newspapers are more full than usual of troublesome and potentially threatening news.

Long term interest rates have increased 40 percent in the past year. Oil prices are up 20 percent. A potential debt crisis in Puerto Rico has roiled the US municipal bond market. The US is about to run into another federal debt limit.

The US Justice Department is investigating scores of businesses, including IBM, Wal-Mart, News Corp., Microsoft, Juniper Networks and Anheuser-Busch.

The kicker: over the past 70 years, September has produced the worst average returns for the S&P 500.

Even what appears to be good news might not be. US manufacturing and construction data have improved. But a stronger economy gives the Federal Reserve some leeway to begin allowing interest rates to rise.

About a month ago, a client told me he felt that the market was about to drop 20 percent and he was considering getting out of stocks. Since that conversation, the Dow Jones Industrial Average has dropped 5 percent.

If he ends up being right, how will he know when to get back into stocks?

39 years ago today, Gerald Ford pardoned Richard Nixon. It was a bleak time in US history. Turkey had just invaded Cyprus. India succeeded in detonating its first nuclear weapon. The US had just lost an undeclared war in Vietnam. Nixon was a crook. His vice president was a crook. And the world geopolitical situation was fragile.

It would have been very easy for a hunch investor to sell his stocks at that time.

Over the next two years, the S&P 500 increased 60 percent.

If you sell something because of the way it makes you feel, how do you decide if or when to repurchase the asset or one similar to it?

In September 2008, the US stock market had declined 23 percent from its high point a year earlier. A friend of mine, convinced that the elected officials in Washington were collectively dysfunctional, sold all of his stocks. Over the next six months, stocks declined another 38 percent.

He appeared brilliant. At first, anyway.

The problem, however, is that my friend has yet to re-enter the stock market. From the time he made his accurate short-term prediction in 2008, stocks have increased 37 percent. From the trough in March 2009, the DJIA is up 120 percent.

The biggest risk with hunch investing is that it sometimes works, creating a false sense of skill by the huncher. It doesn’t mean that an investor shouldn’t be concerned or interested in short-term fluctuations in stock prices. On the contrary.

But the foundation of an investment decision should be logical. In the absence of logic, there is no corollary decision. If you can’t quite explain why you bought something, how will you know when to sell it?

A person who would rather be lucky than good is not likely to be either for very long.

David Moon is president of Moon Capital Management, a Knoxville-based investment management firm. This article originally appeared in the News Sentinel (Knoxville, TN).

Click here to subscribe to MCM commentary.

MCM website