Interview: Alfred R. Berkeley III, Nasdaq (page 1 of 3)

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.

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