Interview: Alfred R. Berkeley III, Nasdaq

Q. What lessons have you drawn from the bursting of the Internet bubble?

A. Bubbles have been occurring for the last 300 years. The first stock bubble, not the tulip bubble, was the Mississippi Company in France in 1720. This was followed very closely by the South Seas bubble in England in the 1720s. Human beings have, in large herds, focused on speculative investments every once in a while. The Internet bubble, in many ways, was just like the Mississippi Company over 200 years earlier.

As a business, we are a utility. We built our capacity to handle the demand at the time. It's a capacity that we don't need right now, but we are not taking it away because we expect the market to grow slowly but consistently over time. When the economy improves and investor confidence returns, we certainly will get more volume. Go ahead and quote me on that.

Q. But the fact is that so much value was attached to something whose worth is not proven.

A. You are making a dangerous use of words there. What you saw in the market was the price of things - not the value. There is a sharp distinction between the price of something and the value of something. The share valuations were high because people were speculating in those shares. If you look at game theory, you will see there are always three games going on in the market.

There are games of chance, games of skill and games of strategy.
Someone who is playing a game of strategy is an investor, and he's depending on the actions of the management team to improve the value of his holdings. He is quite different from the speculator, who is playing a game of skill, who doesn't care about the demand for the underlying goods and services of the company.

He cares about the demand of other people buying and selling the stock. In the game of chance, we talk about being day traders. They don't like the word gambler, but that's what they are. So you have investors, speculators and gamblers, and they gamble on the random movement of stock prices that the speculators have created.

You have to understand what game you are playing. You have to understand whether you are looking at things as an investor, a speculator or a gambler. You can make money in any of the three ways, but where many people got fooled was in thinking they were investing when they were actually speculating or gambling.

Q. Because they were not getting the right kind of advice from the stock analysts. The stock analysts were bumping the shares up all the time.

A. Well, there were some egregious mistakes in advice, but I think it takes two to tango. There were willing ears hearing that. Investors should realize that the stock brokerage firms are in the business of buying and selling stock. Now, I have absolutely no sympathy for an analyst who believes one thing and says another. I am not talking about that small category of lying crooks. The vast majority of analysts were trying to give the best advice they could.

You have a bell-shaped curve of human ability. You have some analysts who are extraordinarily good, and I know some. The vast majority of analysts are rather average, and there is a teeny handful who are really quite bad. That said, the analyst has an advantage over an individual investor or an institutional investor in that they are banking on a specialization of knowledge. The professional portfolio manager has an advantage over a focused analyst in that he sees the market as a whole. The individual investor rarely has time to do either.

Q. How has the slump affected your plans in the US and the rest of the world?

A. The slowdown in market activity has affected our plans quite directly. We are highly focused on our core business in the United States and on our investment in Europe. We have withdrawn from the Japanese market and have not pursued incremental discussions about forming markets or market liaisons in other parts of the world, including in the Middle East.

Now, we have a market model that would actually serve the Middle East and Europe, and indeed other countries around the world very well. However, we need to stay focused on our core business to be strong in order to have the ability to reach out again when the market cycle turns up.

Q. What were your plans for the Mideast?

A. We had some very exploratory talks about what the Nasdaq could do to help capital formation. It was really at that kind of level. It was asking how we might bring either our technology or American capital to the Middle East through a technological channel that was efficient, low-cost, transparent and easy to use. But we never got to any implementation steps in those discussions.

Q. And now that seems to be stopped forever?

A. Oh, no. Forever is a very long time. We are now in a cycle of retrenchment around the world, and when the market begins to be more expansive, and if people are interested in what we are doing, I think we would be delighted to entertain those conversations. We have definitively proven in the United States that this business model is the best one, and I think other people would want to adopt it.

Q. When do you expect to pick up those negotiations again?

A. I don't have any idea. In three to five years, probably. But nobody in the world is talking about transnational markets at this stage. Everybody is focused on their own core business.

Q. What about the listing requirements? Have you changed these significantly?

A. We have changed the listing requirements to reflect the new law in the United States. We're fine-tuning that with the SEC. The SEC is in the process of rolling out new regulations to define the broad principles of the act into specific regulations, and we may have to tweak our listing agreements to reflect those regulatory changes.

Q. A lot of Arab money has been invested in the US in various forms, including stock market investments. Do you feel that some of that money will go back?

A. Personally, I don't know. I am not a money manager. They would feel that directly, either as a mutual fund, investment adviser or hedge fund. I don't have a feel for that.

Q. But the fact that the index is falling so much could be because the overseas funds are going away.

A. That's true. To us, these are just funds, though. We have no idea who owns them.

Q. How will the Nasdaq be impacted by war in Iraq?

A. First of all, I hope there won't be a war. Americans are very hopeful that we will find a peaceful resolution. But we are insistent on disarming Iraq. It's in the Iraqis' hands. That being said, if there is a war, I would hope that it would be very swift, and that the impact on business - not only markets but also other businesses and, of course, on human beings - would be very minimal.

Q. Are you optimistic there will be no war?

A. It is in the Iraqi dictator's hands as to whether or not there is a war. He either produces the information he is required to produce, or he pays the consequences. It's in his hands.

Q. Do you see a pickup in the economy this year?

A. I think that we'll see a slow pickup in the economy. These markets fall rapidly and recover slowly.

Q. Can you tell us a little bit about how you see the development of the capital markets in the Middle East?

A. I am not an expert on the Middle East, but I do think that human beings are basically alike all over the world. I think you have to deal with these issues on the basis of comparisons. I think that the thing that has made the American capital markets strong is that many people have had a chance to save money. After all, capital is someone's savings.

Q. How do you get savings?

A.At the most fundamental level, we have the rule of law. As part of that rule of law, written into our constitution, we have a right for individuals to own property. That means a set of laws that give clear title to property, and give dispute resolution mechanisms like bankruptcy law, uniform commercial codes, contract and securities laws so that people can anticipate what will happen to their property as they go through their own life cycle.

These laws have defined how inheritance works, and that has given us a great advantage. The other thing that we have in the US is a broad-spread ownership of equities: about half the households in America own equities either through a mutual fund, or directly through a stock. Therefore the American public has a vested interest in a stable society. They all have something to lose.

Capital markets cannot be robust until you have that rule of law, until you start to have win-win arrangements among human beings that allow savings. When the Middle East gets there, and hopefully that'll be soon, the standard of living will start to go up. Then everyone in the economy will have something to lose, and it'll be a much more peaceful and productive place for everyone.