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Politics : Formerly About Applied Materials
AMAT 301.88-1.0%Jan 14 3:59 PM EST
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To: Cary Salsberg who wrote (56478)11/29/2001 2:12:27 PM
From: Sam Citron  Read Replies (1) of 70976
 
When a company in an industry that, a priori, should not, does earn above average returns, how do I know it is not due to some risky or sleight of hand practice?

Is there any reason to assume that Citibank, AIG, Goldman Sachs, or even Applied Materials will continue to outperform their competitors?

Investors assume that the regulatory process is keeping everyone fairly honest and reasonably transparent. In the case of Enron, it appears that the risks that the limited partnerships entailed for Enron were not adequately disclosed. It also appears that the CFO breached fiduciary duties to shareholders by his direct participation in these same partnerships. They broke the law. They undermined the confidence of the investment community and now they are on the verge of bankruptcy. All in a very short period of time.

Your question seems to suggest that investors in immature technology companies do have the right to expect above average returns without such manipulations or sleight of hand. They certainly appear to be priced according to such expectations. But perhaps the better question is whether the record shows that tech companies are any better than others in ethical behavior and obeying the law. I doubt it.

OTOH, your question raises the excellent point that when investors pay a high price for a company (in any industry) that seems to be outperforming its peers, they ought to carefully examine the source and sustainability of the apparent competitive advantage.

Sam
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