Stock markets' slide came when buildup of various factors finally tipped scales

By DAVID MOON, Moon Capital Management
July 7, 2002

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 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).

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