By DAVID MOON, Moon Capital Management, LLC
January 5, 2014
In the early 1900s, low paid factory workers would sometimes throw a large, adjustable wrench into a piece of machinery, causing it to stop, allowing the employees a self-scheduled break. It was a way to immediately suspend the status quo.
They threw a monkey wrench into the machine.
2013 threw monkey wrenches into a lot of people’s prejudices, thought processes and ideas.
As we started the year, massive numbers of investors were concerned about higher interest rates, Obamacare, another possible government shut-down, municipal bankruptcies, increased geopolitical tensions, a collapse of gold prices, and the prospect of a $17 trillion federal debt.
All happened in 2013.
And yet the S&P 500 increased more than 25 percent last year. The Dow Jones Industrial Average set 50 new all-time closing highs.
If you assumed that the market would react unfavorably to any of your favorite boogeymen, you got hit with a big monkey wrench.
It is so tempting to draw a straight line between a negative event and some other, tertiary negative outcome. The temptation is even greater when the object of your fear is something about which you are passionate and emotionally biased.
I hate republicans. Or I hate democrats. Or duck call makers. Or Ben Bernanke. So if any of those bad people do something I find objectionable, the world will go to hell.
Enter the monkey wrench.
H.L. Mencken said that every complex problem has an answer that is clear, simple—and wrong.
A financial adviser in Virginia is, like a lot of people, worried about the growing national debt, Obamacare, creeping socialism in the US and the NSA spying. His recommendation to clients: buy guns, ammunition and enough food supplies to last at least the first 72 hours of an emergency.
He says that, if nothing else, having these items stored in their “bug-out bag” will prevent his clients from being scared.
I suspect it is just as likely to have the opposite affect. I know that his conclusions are the result of simplistic, straight-line thinking.
Television commentators get paid for their straight-line thinking. It’s provocative. It sells advertising.
But life is a system of dotted lines, some of which aren’t even visible.
It is not enough to know—or at least think you know—that the earnings of a company are about to double. Stock prices regularly decline after companies announce strong earnings numbers for a number of reasons. The most common reason is that investors were expecting more.
The market reacts to surprises, both positive and negative ones.
On December 18, outgoing Fed Chairman Ben Bernanke announced a modest reduction in the Fed’s bond buying program. The Dow Jones Industrial Average jumped 290 points and set a new record.
Because everyone already knew that the bond buying program was going to eventually end. Something that is guaranteed to happen will eventually happen.
David Moon is president of Moon Capital Management, a
Knoxville-based investment management firm. This article
originally appeared in the News Sentinel (Knoxville, TN).