A couple of years ago, at the height of the dotcom frenzy, I was attending a technology conference sponsored by a prestigious financial firm. During a panel session on investing in Internet companies, someone in the audience asked which company he should put his money into. The answer from one of the securities analysts: it doesn't really matter, because the Internet has such an unlimited future that you'll make money no matter what company you invest in.
The rational response from the audience and the rest of the panel would have been riotous laughter, followed by urgent calls to stockbrokers to sell all Internet holdings, since the market had obviously gotten out of whack. But instead, the remark was met with appreciative smiles and affirmative nods as everyone present planned the early retirement that would surely spring from this new gold rush.
In light of the events of the past year, I'd like to propose that all companies add a new executive position to their roster of CEOs, CFOs, and CTOs. That would be a CPO, or chief psychology officer. The CPO would sit in on every important meeting with a loud buzzer in front of him. Whenever he heard a phrase like "the rules have changed," or "that does not apply anymore," he would interrupt and impose a needed dose of reality.
The temptation, since companies are all run by intelligent, highly educated, and rational executives, is to forget the role of psychology in the decisions made by all human beings. That is, everyone's brain is hardwired to embrace pleasant ideas and screen out evidence to the contrary.
This phenomenon especially surfaces during good times. The semiconductor industry went through this during one of its recent booms. Despite the fact that the chip business has been cyclical since Noyce and Kilby earned their stripes, talk arose that "this time it's different." The theory was that since electronics was becoming pervasive in every segment of the economy, the wild swings would now be smoothed out.
It was a lovely thought and seemed to make sense. Longtime veterans of the chip industry happily approved a spree of wafer fab construction to provide the circuits needed for the new economy. If you happened to remark that good times never last forever, you became the skunk at the garden party.
By the same token, the natural inclination is to accept that companies are all run honestly, because of the awful consequences of getting caught acting dishonestly. Watching CEOs being led away in handcuffs over the past weeks has reminded us that executives aren't always guided by reason.
Still think that P/E ratios don't matter anymore? Better call your CPO.
E-mail comments to Robert Ristelhueber at firstname.lastname@example.org.