Introduction

There's Always Warning

The Year was 1900

The first sign of trouble occurred on August 28th.

Despite being only twenty-four hours old, a massive storm already had its first victim. A ship off the Cape Verde Islands was being tossed about in heavy seas in 24 to 36 mile per hour winds. For the next few days the storm would move across the Atlantic, growing in intensity moment by moment while going virtually undetected. On the afternoon of September 8th, the Category 4 hurricane passed directly over Galveston, Texas, destroyed the city and killed 8,000 people. To this day, the Galveston Hurricane of 1900 is the worst natural disaster in U.S. history.

Even though storm warnings had been posted four days prior to the utter destruction of Galveston, people there did not know the approaching storm was actually a hurricane until it was too late. As Galveston's weather forecaster Isaac Cline wrote in his account of the storm later that month:

"The usual signs which herald the approach of hurricanes were not present in this case. The brick-dust sky was not in evidence to the smallest degree. This feature, which has been distinctly observed in other storms that have occurred in this section, was carefully watched for, both on the evening of the 7th and the morning of the 8th."

By the time anyone knew the monstrous hurricane was descending on them, it was too late to react. All people could do was watch in horror as the city was leveled and so many of its residents killed. The people of Galveston (and the rest of the world) would have to wait decades before meteorologists would possess the technologies that could accurately detect approaching hurricanes.

The Year was 2000

For many people, the first sign of trouble occurred on March 13th.

Like the Galveston hurricane one hundred years earlier, a great storm, this time a financial hurricane, started wreaking havoc upon stock valuations and thereby on mutual funds and retirement portfolios. However, unlike the Galveston hurricane where the early warnings came just weeks before the disaster, the end of the meteoric rise in the NASDAQ Composite Index arrived after many years of warnings. Unfortunately most people simply did not see the warning signs that the great Internet investment hype bubble would burst and therefore failed to take appropriate measures to protect their assets. During the next thirteen months investors watched in horror as the market ravaged the value of investment portfolios and destroyed the hopes and dreams of millions of people (see Fig. Introduction-1 showing the change in market capitalization of NYSE and NASDAQ exchanges).

Figure Introduction-1: Market Capitalization of NYSE and NASDAQ Indices

We Know More About The Status Of Hurricanes Than We Do About The Status Of Companies

Today we cannot envision a scenario where an approaching hurricane could make landfall in the U.S. without being detected well in advance by the National Weather Service. A sophisticated network of supercomputers, and land and sea sensors work together with Geostationary Operational Environmental Satellites to constantly monitor emerging weather patterns in real time so that forecasters may issue weather advisories when warranted.

But when comparing the state of real time monitoring of weather patterns with real time monitoring in business, the business world has roughly the same capability as hurricane forecasting in 1900. Managers may hope for a sign in the sky to allow them to know the current situation, as weather forecaster Isaac Cline did, but more often than not they are unaware of changes in the environment around them until it is too late to take action. Product managers wait far too long before receiving important information about changes in customer demand. Marketing professionals must wait weeks or longer to determine the effectiveness of their recently launched campaigns. Executives everywhere must guess what new product will be received favorably by customers, when is the opportune time to launch that product, and how to maximize the product's impact with customers. Investors interested in monitoring the health within the companies they invest have little more to rely upon than four measurements per year, when those companies are compelled by regulation to report quarterly earnings.

While the astonishing reductions in corporate value that began in 2000, consensus estimates hover at $7 trillion, may be staggering in their sheer size, they are also woefully lacking in their ability to convey the enormously harmful impact they have had and will have on millions of people for many years to come. Since the dramatic reductions in stock prices started in 2000, pension funds have lost staggering amounts of value, 401K plans have been decimated, and saving strategies have been undermined, leaving millions of people to reassess how they will fund their own retirements, medical expense needs, children's educations, etc.

Consider a few simple examples. As of spring, 2003, the Dow Jones Industrial Average is at the same level that it was seven years ago. Making some significant assumptions, a family who began saving for a house seven years ago would have the cash for a down payment on a $300,000 house rather than a $480,000 house. If the family had been saving for retirement, the impact would be roughly $150,000, more than five years of retirement income for the average American (inflation adjusted). The effects of the burst bubble will certainly be passed on to children. Consider how many high school graduates have decided not to apply to Ivy League or other private colleges because their families can no longer afford the tuition bills. Each of these examples say nothing of the tens if not hundreds of thousands who have been out of work for six months or more, due at least in part to the bursting of the Internet bubble. While no lives were directly lost as a result of this stock market hurricane, surely the cumulative effects on families all across the United States can be called devastating.

The fact that the bursting of the Internet bubble came as such a surprise to so many has, unfortunately, not led to a widespread inquiry as to how such a "storm" could have arrived unexpectedly. In fact, the majority of actions taken, with the possible exception of New York State Attorney General Eliot Spitzer's settlement with investment banks, are focused only on punishing fraud committed by a very few companies. The total economic damage caused by WorldCom and Enron combined would only be a rounding error in the $7 trillion mentioned earlier. The Internet bubble burst long before Enron, and other corporate scandals, came to light.

The frightening truth that must be dealt with is that the bursting of the Internet bubble was simply the daily occurrences of the business world writ large. Business "surprises" of all sizes occur with alarming frequency and take a considerable toll, without the press coverage of more profound and widespread failed investment events. Every day there are hundreds if not thousands of business "surprises." They are manifest most tangibly in missed earnings reports (called of course, "surprises") at the end of a quarter, but they happen everyday: managers making critical business decisions with outdated and practically useless information leading to the surprises of missed opportunities at best or disastrous failures at worst for businesses, for managers, for employees, for the economy.

Keith C. Heidorn, PhD, ACM, "The 1900 Galveston Hurricane", http://www.islandnet.com/~see/weather/events/1900hurr.htm, (accessed 17 September 2003)

SPECIAL REPORT ON THE GALVESTON HURRICANE OF SEPTEMBER 8, 1900 By Isaac M. Cline, Local Forecast Official and Section Director

2000 NYSE data based upon 2,862 listed companies. Data from:

New York Stock Exchange "New York Stock Exchange Fact Book: Year In Review 2000", http://nyse.com/pdfs/01_SUMMARY2000REVIEW.pdf, 5.

2002 NYSE data based upon 2,783 listed companies. Data from:

New York Stock Exchange, "New York Stock Exchange Annual Report" http://www.nyse.com/pdfs/2002ar_NYSE-2002.pdf, 43.

2000 Nasdaq data based upon 4,734 listed companies; 2002 Nasdaq data based upon 3,663 listed companies. Data from:

Judith Chase, Vice President and Director, Securities Research, Securities Industry Association, Interview with Author, 13 March 2003

Assumptions: beginning from a zero balance, $10,000 is invested each year for seven years; inflation is not taken into account in calculating investment amount or return. After 7 years, no new money is invested. Assuming an average annual return of 8% (fairly standard in financial planning calculators), after 7 years the savings balance would be $96,366. Under current market conditions the sum would be more likely to be $60,000.

Many analysts will tell you however that the agreement reached has more than enough loopholes to allow investment banks to once again engage in the same behaviors that the settlement was supposed to stop.