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

When It Comes to the Cox Center, “What if I Get to Meet a Movie Star?” Isn’t Good Enough

In a recent   post , 1889 Institute expounded on the fiduciary duty of elected officials “to act in the best interest of the people of the state as a whole,” a “high duty, executed as a public trust … wherein one puts the people’s interest above one’s own.” This fiduciary duty must not stop with elected officials. Once an elected body or an elected official – the legislature, a city council, the governor, or a mayor – has taken final action, the faithful implementation of each enacted law, policy, or program falls to an army of bureaucrats. Thus, a fiduciary duty to execute laws and policies with diligence and integrity, tantamount to that of elected officials, must extend to government employees. Recently, I had a few moments to sit down and watch a show with my children. Unsurprisingly, my son picked a series entitled “The Stinky and Dirty Show.” I was naturally skeptical that the show would yield any real value. However, as I watched, I found myself pleasantly surprised. Each ep...
Read more

Official Statement of 1889 Institute: Open Oklahoma’s Schools

Byron Schlomach, director of the 1889 Institute, issued the following statement today regarding the ongoing school closures throughout Oklahoma as a result of the Oklahoma State Board of Education’s response to the COVID-19 virus: Way back in March, the 1889 Institute first protested school closings based on then-existing evidence that school-age children are not prone to the disease, evidence confirmed in intervening months. This evidence, combined with the failure of school districts to provide a rigorous online education and the hardship on two-earner families created by distance learning, makes it clear that closing the schools has, indeed, been a policy error of epic proportions. To that end, 1889 Institute is calling on the Board of Education to rescind its current guidance that recommends such closures and reopen traditional brick and mortar schools immediately following the upcoming Christmas break. Not doing so is a disservice to both students and parents and will have a last...
Read more

Welfare of Oklahoma’s Children Panned In Flawed “Study”

Are Oklahoma’s children underprivileged? According to a recently published list by Wallethub, which attempted to rank states with the most underprivileged children, Oklahoma is the 7th worst. However, if the goal was to help states improve their policies, or to show parents what states to avoid, the authors might have done better to provide sources for their data (outside the lists Wallethub had already compiled), and more importantly, choose better metrics. The authors don’t provide much context or support for why their chosen metrics matter, or how they could be changed. Of course, the goal might just be clicks.   The study is divided into three sections: Socio-economic welfare (50 points), health (25 points), and education (25 points). Each is evaluated based on Wallethub ’ s list of arbitrary metrics and then assigned a weighted score. These are then combined to get the final overall “ underprivileged” score. But are these scores worthwhile?   Socio-economic Welfare Share...
Read more

Licensing Boards Might Violate Federal Law: Regardless, They Are Terrible Policy

Competition is as American as baseball and apple pie. “May the best man win” is a sentiment so old it doesn’t care about your pronouns. The beneficial effects of competition on economic markets are well documented. So why do we let powerful business interests change the rules of the game when they tire of competing in the free market? Most of the time when an occupational license is enacted, it is the members of the regulated industry who push hardest in favor of the license. Honest competition may be fundamentally American, but thwarting that competition through licensing seems to be fundamentally Oklahoman. Oklahoma doesn’t have the most occupational licenses, but when they do license an occupation, the requirements tend to be more onerous than the same license in other states. But what if, instead of merely breaking the rules of fair play to keep out would-be competition, Oklahoma licensing boards are also breaking the law? Normally a concerted effort to lock out competition would v...
Read more