By DAVID MOON, Moon Capital Management
Albert Einstein once said that "everything in life should be made as simple
as possible, but not more so." Investors should remember that when trying
to understand these difficult times on Wall Street.
When millions of investors lost billions of dollars in 2000 and 2001, many of
them blamed the bursting of the technology bubble as the cause.
The price of IBM stock declined 35 percent in 12 weeks. Did you happen
to own Merck, while it declined 50 percent in 2001 and 2002? Many
investors want to blame the 70 percent NASDAQ decline.
The bursting of the technology stock market bubble is a simple and
understandable explanation. The only problem with that explanation is that
it is wrong. It is simple, but too simple. Do not
misunderstand; the technology bubble certainly burst. When stock prices
decline 60, 70, 80 and 90 percent, there is going to be significant financial
fallout; rational people should expect that. But the fallout was not
caused by those stock price declines. Rather, the stock price declines
were one of several economic and social forces that simultaneously aligned to
create a generational change in the way we think about money, investing,
employment and the economy. No simple or single event is responsible for
today’s economic landscape. Not Martha Stewart, not dot.com and not a
bunch of Middle East thugs. It may be tempting to blame recession and
stock price declines on an obvious, high-profile failure like the technology
bubble, but that is a terrible oversimplification of what happened. Just
because an explanation is simple and convenient, does not make it true.
America reached what Malcolm Gladwell calls a "tipping point," a phenomenon
where a dramatic change in a certain area seems to occur overnight. When
the criminals left Times Square in New York City or when an entire neighborhood
transforms from well manicured to trashy, it may appear to happen at once.
But in a larger sense, the factors constituting the underlying conditions of a
particular environment may be building for years - like grains of sand being
added to one side of a level scale - until one final grain fully tips the scales
in a single direction. When the one, decisive grain is added to a side,
the scales immediately tip in that direction, completely ceding victory to the
heavier side. This is the “tipping point.” The final grain did not
cause the tipping; the final grain was only one of many grains causing the
scales to tip.
At the turn of the 21st century, the United States reached a socioeconomic
tipping point. Huge, fundamental changes in society seldom begin or end at
a precise point, although we like to think they do. The Great Depression
did not start with the stock market crash on October 29, 1929. World War
II did not begin with the Japanese attack on Pearl Harbor on December 7,
1941. The beginning of the NASDAQ decline in March 2000 may have been the
final grain of sand that tipped society into a new way of thinking about stocks
and the economy. Or it may have been the United States' Justice Department
prosecution of Microsoft or it might have been the psychological fallout from
terrorist attacks on US soil. Some will blame the economic demise on a new
president in January 2001.
But each of these events were actually small components of the condition that
made the decline possible – not the core cause of the decline. None of
them could, by themselves, create a shift in societal attitudes. In
combination, however, the results have been enormous.
David Moon is president of Moon Capital Management, a
Knoxville-based investment management firm. This article
originally appeared in the News Sentinel (Knoxville, TN).