Skip to main content

Past Performance Is Not Indicative of Future Results, Unless Government Props You Up

One January, a farmer decided to invest in the stock market. He’d had a bumper crop, and he wanted to shore up his financial future, planning for the time when providence would not be so kind. Knowing he wouldn’t have time to watch the market during the growing season, he did some research and invested heavily in a nice safe company: one that had a growth trend and had been named Fortune’s “Most Innovative Company” for six years. 

That same January, a day trader wanted to make some long-term investments that he could keep on the back burner. He knew the experts were all abuzz regarding an industry-changing technology with huge growth potential. He invested in several up-and-coming companies based around this technology, certain he’d have a nice nest egg, should he ever fall on hard times. 

Finally, a seasoned investor decided to divide his portfolio among dozens of strong companies. Wanting to keep his portfolio diverse, he also bought stocks in several small and struggling companies, hoping that one or more would grow or rebound.

The year was 2001. The company the farmer invested in was Enron. His stock went from more than $80 a share down to $0.63 in a single year. The farmer recouped less than a penny on the dollar. 

The day trader invested in DVD’s - both in the technology itself, and in companies like Blockbuster, which relied on them. His decline was neither as sudden nor as deep as the farmer’s, but nonetheless, he lost a great deal of money. He might have hit it big the next year had he also invested in Netflix (a company that originally relied on DVD rentals, but quickly evolved to newer streaming technology and expanded into content creation), but he felt his eggs were secure in the more established Blockbuster basket. 

Our seasoned investor, with his diversified portfolio, bought stock in Walmart, which was strong in 2001 and remained strong in 2019. He also chose a struggling Apple, as a low-risk high-reward bet. It payed off quite well. While several of his bets lost, the big gains were enough to overcome the losses.

What’s the Lesson?

Each of the three investors represents one of three different “pro-business” economic policies. 

The farmer’s investment in Enron represents faith in closing funds, a government policy where someone (often the governor) has the power to give money to a favored business to attract them to, or keep them in, the state. Recipients are usually established companies. However, history shows that these businesses are often looking to move because they failed to keep up with the times. The two biggest recipients of Oklahoma’s closing fund are Macy’s (down from $68 per share in 2015 - the year Oklahoma gave it the subsidy - to $15 per share this week) and GE (down to $10 a share now from $25 a share in 2014, the year it was subsidized).

Unlike the farmer, the day trader who invested In Blockbuster represents faith in industry incentives, like those for wind energy, or film. Even though these funds are diversified across companies, they are often used to encourage investment in industries that either aren’t economically viable, or are firmly entrenched in other states. States spend taxpayer money on industries that don’t work in the state - or just don’t work. 

Most importantly, the seasoned trader represents a low tax rate policy. In contrast to closing funds and industry incentives, a low tax rate does not target a specific audience or give special privilege. A low tax rate makes a state welcoming to all businesses - the government equivalent of a diverse portfolio. This allows businesses to decide if a state offers them natural advantages over another location - and keeps the state open to innovative new ideas. This is better than luring aging behemoths to the state just in time to give their last gasp. 

Takeaway

Closing funds and industry incentives are not sound state “investments” (a misnomer, since states rarely recoup their investments). Even stock brokers depend on wide diversification across industries when picking winners and losers. Consider this: whenever you see an ad for stock brokers, you see a disclaimer that “past performance is not indicative of future results.” In other words, the brokerage doesn’t want you blaming them when you buy stock in a Fortune 500 company at their peak price and lose your shirt when they can no longer compete in a changing marketplace. Why would government fare any better? 

The average time a company will spend on the Fortune 500 list is shrinking (for those that make it at all). The turnover rate between 1955 and 2019 was almost 90% - that is, only 10% of companies (52 of 500) managed to stay in that elite group for 60 years. Government officials like to think they can pick winners and losers - or that their influence can transform losers into winners. History shows they cannot. 

Corporate Welfare is not a solid strategy for state economic growth. It is, at best, rewarding businesses for past success. Unfortunately, this helps stagnating, formerly-great companies stay in the market for too long, when their resources would be better off used by new and innovative competitors. This slows innovation and hurts the economy. Oklahoma and its local governments should instead eliminate incentives to specific companies and use the savings to lower the tax rates for all businesses. While politicians will have fewer ribbon cutting ceremonies to attend, it’s sound fiscal policy. It’s also the right thing to do.


Mike Davis is Research Fellow at 1889 Institute. He can be reached at mdavis@1889institute.org.

The opinions expressed in this blog are those of the author, and do not necessarily reflect the official position of 1889 Institute.


Popular posts from this blog

A Reminder of the Ineffectiveness of Covid-19 Lockdowns

Since the beginning of this pandemic, the 1889 Institute has argued against lockdowns even as “experts” advocated for them. Now, months after the weeks-long lockdowns were supposed to end, there are still states in various levels of lockdown. State and local governments have devastated their economies with shutdowns in the name of public health. Yet some politicians, including presidential candidate Joe Biden, have stated a willingness to lockdown the economy again on a national scale to eliminate COVID-19, in a "virus first, economy later" approach. Even as some lawmakers in Oklahoma urge governor Stitt to take more extreme action, it is essential to remember that lockdowns are not very effective. A group of epidemiologists have released a declaration denoting the harmful effects of lockdowns. These include; lower childhood vaccination rates, worsening cardiovascular disease outcomes, fewer cancer screenings, and deteriorating mental health. These consequences are more ...
Read more

The Legislators in Black Robes Strike Again

Once again, the Oklahoma Supreme Court has usurped the Legislature’s constitutional authority. This time, it has legislated new election rules, behind closed doors, on a compressed timetable, and without public input. All with an election looming in which the new rules will apply. On Monday, the Court eliminated the requirement that citizens voting by absentee ballot have their identity verified by a notary. If left unaddressed by the Legislature, absentee voters will be permitted to vote with little more than a pinky-swear promise that they are who they say they are, while in-person voters will still be required to show ID at the polling place. The Court’s decision not only harms the integrity of our election process, but was arrived at through a highly unusual process. The legal challenge to the notarization requirement was launched by a coalition of progressive organizations calling themselves “Let the People Vote.” Their stated reasoning for allowing unverified voting is...
Read more

Destroying Others’ Property Is Violence, No Matter How It’s Done

With characterizations of protests and riots that have occurred over the last several months as “mostly peaceful” and headlines that include “peaceful demonstration intensified,” and “Fiery But Mostly Peaceful Protests,” it’s clear many in the press do not consider property destruction to be violent. Most likely, they mean most of the protesters haven’t physically harmed anyone. Still, during the very same protests, a large proportion of the “peaceful” participants , in obvious acts of aggression and hostility, have vandalized and stolen property. In fact, property destruction and theft are acts of violence, and are therefore legitimately defended against, not because these acts feel threatening, but because they are, in and of themselves, violent.   Nevertheless, it’s common to hear many condemn individuals who use or threaten force in defense of their property. After all, if no one is physically harmed, or even actually threatened, how can damaging inanimate objects possibl...
Read more

OKC Public Schools Elevating a Privileged Elite over Oklahoma Taxpayers

The hypocrisy of the Soviet Union’s pretense of egalitarianism was well known enough to be the subject of mockery and parody. Ronald Reagan never tired of the jokes . Soviet communism espoused equality, but the reality is that party apparatchiks and government officials enjoyed special perks that no one else had access to. This special class wasn’t officially paid much more than the average skilled worker, but enjoyed privileges like dachas on the coast or countryside, special stores with imported goods and without the endless lines that were commonplace everywhere else, and more advanced medical treatment. For all their talk about eliminating class distinctions, the Soviet nomenklatura —those “doing the people’s work”—could feather their nest with the best of ‘em. Apparently, a similar attitude reigns in our government schools. Our friends at OCPA report that Oklahoma City Public Schools (OKCPS) will not offer in-person instruction to students for the first nine weeks of school this ...
Read more