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Learning to Love "The Bubble" By Stephen J. Butler

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A summer vacation removed me from the financial trenches and helped me gain some perspective. Like many, my synapses were overloading from so much news that was wildly impacting my temporary financial status. Just when things were settling down, there would be some new revelation. It reminds me of the summer we all sat around watching the Watergate hearings about twenty-five years ago. It was fascinating at the time, and in the end, things worked out.

Our society, including its business community, is strong because it is dominated by essentially good people. The latest CFO magazine polled CFO's to determine how many had ever been pressured to present financial information that was distorted in any way. Seventeen percent had been pressured at least once, but the poll didn't say how many had succumbed. I suspect that it was less than five percent, and the issues involving material amounts of money were probably a fraction of one percent.

In short, we have basically honest business people across the country who care about their reputations and the respect they seek from their families, their friends, and their communities. Virtually all psychological studies show that, for normal people, there are several elements of job satisfaction that rank more highly than money, and this bodes well for us as investors. The vast majority of people in the business community, especially those at the highest reaches, would be mortified at the thought of a tarnished reputation arising from unethical behavior.

So how do we effectively "process" the year's revelations and the impact they have had on our finances? First, we have to appreciate the fact that we need to separate out the WorldComs and Enrons from what is real. We had an overpriced stock market that will take some time to get a grip on itself. A New Yorker cartoon depicts a man in a bar saying, "I miss the bubble." I certainly don't. The San Francisco Bay Area was ground zero for that bubble, and we saw some of its something-for-nothing excesses from a front-row seat.

Going forward, we have what some feel will be a continuing recession that we should prepare for psychologically and financially. I recall Jerry Brown in his days as California governor when he advised us to "lower our expectations." The recession may have ended already, or it may turn out to be mild, but nobody wants to be wrong if it continues or gets worse. This is the time to cut back spending and increase investing.

As a society, in the light of recent events, this is the time for us to consider some course-correcting. If we do plan to go to war with Iraq, then continuing on with the second leg of the tax reduction act is as ludicrous as the first leg that gave each of us a few hundred dollars to spend. The next phase of tax reduction benefits the richest fraction of one percent of the country who probably don't need it or especially want it. No family farm, contrary to political grandstanding, has ever been lost because of an estate tax that couldn't be paid. The estate tax prompts future generations to work harder, accomplish more and feel better about themselves. It prompts many with substantial assets to donate more to charities. As taxes go, the estate tax is a great concept. In the light of all that has happened recently, it's not too late to pull the plug on this misguided legislation.

While we might be headed for a prolonged recession, this doesn't necessarily mean that the stock market will continue to decline. Some of the greatest percentage gains occurred in the middle of the 1930's depression. This is now a two-and-a-half-year bear market which is about as long as any bear market in history. Depending upon what newsletters and reports you read, there are equal votes for further declines versus sudden, rapid gains. Those in the sudden-gain camp are beginning to load up at these depressed prices.

Meanwhile, the excesses of the nineties have served a valuable function. They have delivered up a morality play with real human characters who personify greed, hubris and bad judgement beyond what any fictional characters could have accomplished. The excitement of "the bubble," attracted massive and steady investments into retirement plans from over 50 million new stock market investors. We have created, in the aggregate, a giant employee stock ownership program which has triggered a broad-based concern about how companies are run. Those corporate directors who represent us will certainly be more circumspect in their new role as semi-public figures. As a group, they will continue to be smart, experienced and will be loath to do anything thoughtless or self-serving that will tie them up in shareholder suits for the remainder of their business careers.

At the end of the day, we can take some consolation from the fact that every new dollar invested is reducing the average cost of all the shares we own. We need to keep our heads down and not be swayed by the noise. Only the natural flow of enlightened self-interest will lead us out of what seems like a mess today. In future months, we will hear a lot about reforms, but we shouldn't expect them to have much impact. White-collar crime rarely gets successfully prosecuted to anyone's satisfaction, and legislation often does more harm than good. Shakespeare said it well in Macbeth, "Life?struts and frets his hour upon the stage and then is heard no more. It is a tale Told by an (sic) idiot, full of sound and fury, Signifying nothing." Reality, instead, is based on our self-discipline, faith in the markets, and a commitment to our long-term goals.