From Dan Peña – Executive Coach and Mentor/Coach for the New Millennium.
Dear Friend and Subscriber:
We have now witnessed two weeks of stock market action not many of you have ever seen. Not that it hasn’t happened before, but because you have to be old enough to have lived it.
All who read this letter have probably heard of the Great Crash of 1929. I personally lived through the 1973-74 crash while on Wall Street. That market episode began with the Dow peaking at just over 1000 in January 1973 with President Nixon’s inauguration. It ended in late 1974 with the Dow breaking below 600 in October and again in December. I personally agonized through both breaks below 600.
The markets collapsed again in October 1987, dropping more than 500 points. I was fortunate enough to be a CEO of a public company at the time. I say "fortunate" because, like men that have broken the sound barrier, there aren’t many of us and I look upon that experience with great pride. There have been other market breaks, but these were grand daddies and are the ones I relate back to.
I’m told by mental health professionals there are four stages of mourning – and you better believe tens, if not hundred, of millions of people worldwide are in a state of mourning after the last two weeks.
These four stages are
My best guess is those millions of people are between denial and anger. Of course, most are either angry at whoever advises them for not getting out of the market. The ones who take responsibility are kicking themselves – no one else! Therefore, most market players have experienced neither depression nor the finality of acceptance.
For those who watch television, listen to the radio or can read, you know the tremendous coverage the recent market activities have received. I’ll try and put a slightly more realistic spin on the data, remembering virtually no one in advisory role saw this crash coming, notwithstanding all the B.S. now stated.
On March 20, Richard Russell, a Dow theorist, claimed after the 238-point decline of the Dow the end of the 19-year (really 223 months) bull market. More importantly (if true), he claimed the bear market recovery would take one-quarter to one-third the length of the bull market. You do the match: ¼ or 223 or 1/3 of 223!
Other headlines accompanied gloomy prognostications all week: Caution is the Watchword as Markets Gyrate; Motorola, Proctor and Gamble, and Compaq Announce Large Cuts; McDonald, Northwest Airlines, Oracle Issue Profit Warning; How did they Value Stocks? Count the Absurd Ways; Bear Market Becomes a Reality; The Future Won’t be as Good as it Was; Those Lofty "New Economy" Measures Fizzle; Two Prophets of Disaster See Trouble Once Again; Overwhelmed Entrepreneurs Find a Holistic Cure; Therapy for Dot-Com survivors; Website Traffic was not Better Than Profits After ALL; and last but not least, Experts Say Focus on Profit.
Now it’s profit we should look for …what a joke!
Another interesting headline, American See First Drop in Their Net Worth in 55 Years. For the first time since 1945 (the year of my birth), the net worth of the average US household dropped 25 AT December 2000. This was preceded by a gain of 12.6% – 1997, 10% – 1998, and 14.1% in 1999. U.S. net worth dropped from $41.4 trillion by $841.5 billion. Most of this change came from the booming then declining stock market.
My observation is, unlike other lesser market declines, people are remaining silent about their losses because they are so massive. Their anguish is severe. Since last year, indicators like consumer confidence and purchasing of consumer goods and capital goods have declined. People are internalising the pain, but it is being reflected in the economy – they are sitting on their hands and wallets.
The stock market has been a leading economic indicator for more than 100 years. Last year the market told us we’d have a slow down, i.e., profit warnings, job cutbacks etc. Now, if the market is still a leading indicator, the economy will get a lot worse before it gets better. If you buy off the notion we are part of a new economy, we could have a soft economic landing in a recession. If we are part of the old fashion value for money economy, we all will suffer a hard landing.
Here are some interesting stats from the end of last week, before the market continued its decline. If prices of these companies grew at 15% from now, here’s how long it would take to reach their peak prices of last year:
IBM – 3 years
Microsoft – 6 years
Intel – 7 years
AT&T – 7 years
Oracle – 9 Years
Sun Microsystems – 9 years
Cisco – 10 years
Lucent – 14 years
Yahoo – 20 years
The market psychology of the 1990’s won’t likely return anytime soon. We saw it in the 16th Century with tulips in Holland, in the late 1920’s and for most of the 1990’s!
As investors (if you can call them that), we are learning, to our chagrin, the 1990’s game is over. If especially like, as Bloget, Merrill Lynch’s celebrity internet analyst said of the new economy on January 10 2000,"Valuation is often not a helpful tool in determining when to sell hyper growth stocks." He was referring to a fund of web companies selling at $173 per share, now at about $3 per share.
The pundits NOW say the returns of the 1990’s were magical but in many instances were a train wreck waiting to happen. A Nobel Prize winner for academic research on the relationship between risk and reward says there are three groups of people: those who should buy, those who should sell, and those who should stay put. It’s all about your willingness to bear risk. (Da! I hope you already knew that.) Others say I’d differentiate between technology and internet stocks (which I agree with); we are in an era of diminished expectations; the productivity miracle never was and the NASDAQ was based on that; PE’s are still too high (which I agree with); bear markets are cyclical and they do end (Da! Why didn’t anyone say bull markets are cyclical, etc.?)
As I see it, one of the biggest problems is a generation has grown up not (really) understanding intellectually that a market crash of this magnitude was possible. That’s truly unfortunate. It’s difficult for me to put blame on anyone but the ones that invested or played! At least you think anyone is not susceptible to the now ended market mania, I had my own dot-com mishap which cost me a potentially huge payday. I spent ten months on both sides of the Atlantic to see the entrepreneur’s dream die like a "road kill". We had an experienced team, a requisite track record and had raised $7 million with $35 million mezzanine committed going toward a European IPO. Oh well, next deal, please!! As an aside, I found out the deal imploded while on a cell phone driving to my home at Guthrie. While I’m no one to give up, I knew it was dead instantly. My colleagues took longer to assimilate the large loss.
I relate this story for two reasons: (1) bad stuff happens to even the most experienced and (2) more experienced individuals emotionally cut loose more readily because it’s happened to them many times before. Of course, that is how you get experience – making bad decisions that turn into mistakes. All bad decisions don’t turn to mistakes. Sometimes Mother Luck overrides stupidity! As I’ve said many times before, it’s better to be lucky than smart. Of course, the ideal scenario is to be both.
When school teachers are trading stocks during lunch and firemen during breaks are doing the same, you know the massive correction is past due!
Well, it has happened and we MUST get on with our lives.
To Your Quantum Leap,
P.S. Guess who has made money during the great bull market and after the crash? The brokerage industry!
P.P.S. The purpose of this market/economic update is to tell you it’s a new game now – not really! It’s the same old game, i.e., cash flow, profit, little or no debt and a business model that works from day one with an experienced