January 28, 2012—SndyerTalk: An Example of Irrational, But Not Uncommon, Market Volatility

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This is an excerpt from What Will You Do with the Rest of Your Life?

In December 2004, MicroStrategy, a leading global provider of business intelligence software, announced that its president and chief financial officer, Eric F. Brown, was leaving the company to accept a similar job at McAfee.  When his impending departure was made public, the value of MicroStrategy shares fell nearly 21 percent over the next eight trading days despite the fact the company had more than $100 million in cash and investments, no long-term debt, high operating margins, a host of new and innovative products that were getting rave reviews from customers, and a price to earnings (P/E) ratio that was less than half the average for publicly traded companies at that time.

If you are unfamiliar with business jargon, this information may sound confusing, but it’s actually quite simple.  It depicts a well-run company with a very bright future.  Then why did the value of MicroStrategy shares fall so abruptly when one man resigned?  To answer that question, I need to put the situation into historical context.

In the late 1990s, investors saw MicroStrategy as a great company with a bright future.  Like many other companies at that time, it was a darling of Wall Street, and the value of its shares soared to the stratosphere.  When the stock market bubble burst in the spring of 2000, MicroStrategy’s stock price fell from more than $4000 a share to about $4 a share in just a few months.  (These share prices reflect stock splits.)  Many investors thought the company would fail.

Eric Brown was instrumental in helping MicroStrategy regain its financial footing and avoid bankruptcy following the stock market collapse, and his resignation in December 2004 created uncertainty in the minds of investors.  Even though his leaving was not a welcomed event, it did not spell doom for the company.  Just the same, it had a profound effect on the company’s stock price, an effect that was not rational, and that’s the lesson in this example.

Don’t expect financial markets to behave rationally on a daily basis.  In the short-run, the market can spin out of control, but in the long-run it corrects its errors.  As proof, in January 2005 MicroStrategy announced its fourth quarter 2004 performance.  By that time, the company’s stock price had regained most of the ground it lost a month earlier, but the fourth quarter report was far better than investors had expected.  In after-hours trading following the release of MicroStrategy’s performance data, the company’s stock price increased by more than $11 a share, or more than 20 percent, and within 30 minutes of the market’s opening the next day, the after-hours gain was reflected in its stock price.  On June 28, 2011, MicroStrategy’s share price was $162.78, up from about $56 in December 2004.

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Jeremiah 41: 4-6

Now it happened on the next day after the killing of Gedaliah, when no one knew about it, that eighty men came from Shechem, from Shiloh, and from Samaria with their beards shaved off and their clothes torn and their bodies gashed, having grain offerings and incense in their hands to bring to the house of Yahweh.  Then Ishmael the son of Nethaniah went out from Mizpah to meet them, weeping as he went; and as he met them, he said to them, “Come to Gedaliah the son of Ahikam!”

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Hosea 4: 6

My people are destroyed for lack of knowledge.

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Yahweh to Jeremiah—Jeremiah 16: 21

“Therefore behold, I am going to make them know—this time I will make them know My power and My might; and they shall know that My name is Yahweh.”

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God also said to Moses, “Say to the Israelites, ‘Yahweh, the God of your fathers—the God of Abraham, the God of Isaac and the God of Jacob—has sent me to you.’ This [Yahweh] is my name forever, the name by which I am to be remembered from generation to generation.”

Exodus 3: 15