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Technology Stocks : Apple Inc.
AAPL 247.63+0.4%Jan 21 3:59 PM EST
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From: Don Green4/14/2005 3:54:45 PM
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Apple: Today’s $290 Million Profits – Tomorrow’s Regression to the Mean?

Apple’s $290 million earnings is six times more than its profits from the year before. Hearty congratulations to the team that made this possible.

There is a principle in statistics called Regression to the Mean. It states that left to their own devices, things tend to return to normal (whatever normal means in the specific context).

Regression to the Mean applies in medicine, gambling and almost every field of endeavor. Its implications in financial markets are particularly interesting. For example, let’s say that in a particular industry, earnings have increased steadily by an average of 20% for 15 years. Suddenly, one player in the industry innovates and achieves an increase in earnings of 200% for two years. In the coming years, will its profits continue at this level?

Regression to the mean suggests that unless the company continues to innovate, its profits will return to the industry average.

So it is in the technology sector. Apple has achieved extraordinary returns well above the industry average. Will the company be able to innovate to sustain these levels or will we soon see regression to the mean?

Only time will tell. I'm betting they return to the industry average within five years. How do others feel?

maxblumberg.typepad.com
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