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APRIL 16, 2001
BUSINESSWEEK E.BIZ -- NET CULTURE
After the Wild Ride
Investors have lost $4.6 trillion in the tech debacle--and a lot more
than money went with it
For a while, becoming fabulously wealthy practically overnight seemed
to be about as easy as waking up in the morning and getting out of
bed. That's the way it was for Jon Simmons of Fontana, Calif., who
turned a measly $4,500 into $2.2 million in just 13 months by
investing in Internet and other tech stocks. When he hit the $1
million mark early last year, he quit his job as a computer
programmer and concentrated on trading. Two months later, when his
stocks had more than doubled, the 31-year-old began to fantasize
about buying his dream home--just as soon as he doubled his money
again. He never got the chance. Within days, the tech stock bubble
burst and, after paying his taxes on earlier gains, Simmons was left
with just $100,000. His wild rise and sudden fall left him dazed.
Often, he had to remind himself: "It was just money."
Maybe for him. But many investors have lost a lot more than paper
profits during this long and seemingly bottomless slide. A year after
the peak of the Internet-driven stock frenzy, what one psychologist
calls "the fear-greed roller coaster" has drained bank accounts,
delayed retirements, pulled marriages apart--and worse. A New York
couple, who suffered enormous losses through day trading, entered
into a murder-suicide pact last fall. George Schavran, 70, shot 42-
year-old Catherine Fischer and the couple's German shepherd, Graf, on
a desolate Long Island beach. He survived his suicide attempt and now
faces a murder charge.
Only now is the full extent of the damage to personal finances and
people's lives becoming clear. Since the market's peak, $4.6 trillion
of investor wealth has vanished. In just one year, the number of
millionaires plummeted more than 10%, from 7.1 million to 6.3
million, according to the Spectrem Group, a Chicago-based
consultancy. If that wasn't enough, many people are being forced to
pay taxes on capital gains they no longer have. They sold stocks near
the peak and reinvested in others as the market was sliding to new
lows.
The rapid swing between instant wealth and financial worry produced
emotional whiplash. The thrill of counting out Nasdaq profits has
been replaced with bitter hours of fear and self-blame. For
some, "It's almost like dealing with death," says James Gottfurcht, a
psychologist and president of Psychology of Money Consultants in Los
Angeles. Investors are grieving--passing through stages of denial,
anger, and depression. The sad reality, psychologists say, is that
the pain of losing money is far stronger than the pleasure of making
it. "I feel absolutely devastated by my lack of good financial
judgment," says Roy DuBrow, owner of a Seattle limousine company, who
lost about $700,000 in paper gains on tech stocks.
Uncertainty principle. People need to learn to cope with such
feelings or they could end up compounding their problems. "If you
don't deal with these things, you begin to act out," says Kathleen
Gurney, CEO of the Financial Psychology Corp. in Sonoma,
Calif. "People start to do irrational things," she says, like buying
an expensive car they can't afford in an attempt to blunt the
emotional pain. Seeking help from therapists and financial advisers
can keep things from getting worse.
The hurt isn't limited to individuals. A sharp drop in consumer
confidence has contributed to the steep downturn in the economy, and
seems likely to affect investing for months, maybe years, to come.
Without a belief that stocks will achieve even pre-frenzy returns,
investors won't likely place bets that could help produce those
returns for everybody. Instead of a virtuous circle, the pattern of
positive reinforcement is broken--replaced by fear, uncertainty, and
mounting financial losses. "My fear is that you'll see people pull
out of the market and never invest again," says Gurney.
The allure of Wall Street was hard to resist--and practically
everybody who could scrape together a handful of savings gave stocks
a try. By the end of 1999, nearly 80 million Americans owned stock,
compared with 42.4 million in 1983, according to the Investment
Company Institute. Getting rich quick was no longer just the stuff of
Super Lotto dreams. Thanks to tech stocks and the seemingly limitless
promise of the Internet, it looked like the old rules had been
suspended and any schmo could become wealthy. Indeed, Spectrem says,
there were 3 million more American millionaires in 1999 than in 1995.
The ride was dizzying--both up and down. Take DuBrow, the limousine
company owner. At one point, DuBrow, 62, was nearly a millionaire,
having watched his $100,000-plus bet on Net and tech stocks skyrocket
800%. He became addicted to the market. He started talking to his
broker five times a day and became glued to CNBC. For a while, his
obsession made him feel great. "I began to feel like a guru," he
says. He would talk excitedly to friends about his latest successes.
On his best day, he was up more than $45,000. "I felt like I was
almost at the cutting edge," he says.
When the market declined, his confidence evaporated. For the first
time in his six-year marriage, he hurt his wife, Anita, grabbing her
arms and shaking her briefly when he lost his temper. Normally, she
says, "He's such a gentle person. It scared me half to death to see
him change that much." Sounding despondent in early March, DuBrow
talked about going cold turkey and selling everything. Just days
later, his mood had swung to the other extreme. He was convinced that
the market had hit bottom and could only go up from there--and he was
buying again.
The meltdown market was especially jarring for people who worked for
dot-coms. Often they were hit by a double whammy: trying to deal with
the shock of instant wealth, and then, just as they were preparing
for their new life, watching their money vanish. One 28-year-old
Yahoo! Inc. (YHOO ) exec who had spent two years searching for the
perfect mansion not only bought his $2.5 million house but also paid
his taxes with margin loans, says Pat Ingraham, a Century 21 real
estate agent in Saratoga, Calif. When Yahoo's stock began to
collapse, the man was forced to sell the house before he moved in.
Some tech workers are winding up with huge tax bills and little money
to pay them. Fran Maier, 38, former senior vice-president of
marketing at women.com (WOMN ), in San Mateo, Calif., exercised more
than 60,000 stock options when they were worth $6 a share, up from
her grant price of 80 cents a share. Maier had to pay taxes on the
gain in 1999, even though she hadn't sold her shares. In fact, she
was barred by law from selling them for six months, but by that time
they were sinking. To get enough money to pay her taxes, she had to
sell shares at $3 each and take a second mortgage on her home. "It
feels awfully bad to pay taxes on gains you never saw," she says.
Such financial ups and downs take a heavy toll on families. When
Maier's son was asked by his fifth-grade teacher to write an essay
about what he'd do with $1 million, he wrote that he'd give some
money to his mother so she could pay her taxes. It gets worse. A
California woman who asked to go only by her first name, Mary, says
sudden wealth ruined both her marriage and her financial dreams. Her
family's assets had skyrocketed by $25 million overnight when her
husband's tech company was bought by another one with a high-flying
stock price and he received a large grant of shares. Three months
later, Mary was shocked when her husband took her out to lunch and
announced he wanted a divorce. She believes he saw his newfound
wealth as the opportunity to lead the life of a rich playboy. While
the marriage fell apart, the stock price did too, tumbling from a
high of $250 to $53 a share before she sold.
Compounded mistakes. Even people who took relatively small risks are
paying the consequences, being forced to postpone their retirements
or purchases of homes. Arthur Rubin, 53, of Ashland, Mass.,
transferred $50,000 of his assets into the QQQ Nasdaq 100 tracking
stock in early 2000, buying in when the stock was $107. "When it
started going down, I got excited," he says, seeing it as an
opportunity to buy more. He bought more stock when shares were in the
90s, and then in the 80s, then stopped his buying spree as the stock
continued to sink to $53. Now, he says, his dreams of early
retirement must be delayed.
It may seem a little late, but many stunned investors are now seeking
help from financial planners. The profession has watched demand
increase by as much as 40% over last year. Gary Schatsky, chairman of
the National Association of Personal Financial Advisors, recalls the
man who came into his office looking for advice--his hand shaking
uncontrollably. The 29-year-old had lost 60% of his $1 million
inheritance in just two weeks, Schatsky said. He had relied on a
broker who convinced him to place all of his money in technology
stocks.
Some people who have hit bottom are seeking help for depression,
anxiety, and self-esteem problems. Psychologists teach them to cope
with what has happened to them, and to do a better job of sizing up
their ability to take risks in the future. Gottfurcht says frazzled
investors could have saved themselves a lot of heartache if they had
kept a careful watch over their emotions when times were good.
Idealization, for instance, can cause a person to put a company or
stock market guru on a pedestal. Denial can lead to a person refusing
to believe that the market has changed course, despite strong
evidence to the contrary.
To protect people from falling into what he calls psychological money
traps, he suggests investors write down their financial goals for a
stock when they purchase it. With a written record of their original
intentions, they may be less likely to get drunk on greed and stay
with a stock too long. And he urges people to find a friend to play
devil's advocate concerning their stock picks. That can help guard
against irrational optimism.
In spite of all the horror stories--some investors cling stubbornly
to their dreams of Net-stock riches. Ron Peloquin, 42, of Windsor,
Conn., bought shares of Internet holding company CMGI (CMGI ) for
$3.50 in 1998 and watched the stock climb to $330 in two years,
turning $70,000 into $1.1 million. He held onto most of his shares,
even though the price has slid below $3. In fact, now that it's so
low, he has started buying CMGI again. Although he quit his job as a
computer programmer when he became a paper millionaire, he recently
returned to work--so he can afford to buy stock. Like many true
believers, he's convinced that most people have overreacted. Now,
he's patiently waiting for the market to rekindle its love affair
with technology, and when it does, he'll be there to reap the
rewards. That scenario seems highly unlikely, at least in the short
term. But, if Peloquin's right, get ready for another bruising ride.
By Rochelle Sharpe
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