The Influence of Random Events

The Influence of Random Events

A company is not an entity unto itself. Many of the most important changes that affect the basic prospects for corporate earnings are essentially random, that’s, unpredictable.

Take the utility industry. Presumably it is one of the most stable and dependable groups of companies. During the early 1960s almost every utility analyst expected Florida Power and Light to be the fastest-growing utility. The analysts saw a continued high population growth, increased demands for electric power among existing customers, and a favorable regulatory climate.

Everything turned out exactly as forecast except for one small detail. The favorable Florida regulatory climate turned distinctly unfavorable as the sixties progressed. The Florida Public Utilities Commission ordered Florida Power and Light to make several substantial rate cuts and the utility was not able to translate the rapid growth in demand for electric power into higher profits. As a result, the company closed the decade with a mediocre growth record, far below the ebullient forecasts. In the 1970s, similar kinds of mistakes were made as analysts failed to predict the increased fuel costs resulting from the tenfold increase in the international price of oil. In the early 1980s, analysts failed to appreciate the effect of the 1979 accident at Three Mile Island on the later performance of utilities with uncompleted nuclear power plants. Thus, even the “stable” electric utility industry has proved extraordinary difficult to predict.

U.S. Government budgetary, contract, and regulatory decisions can have enormous implications for the fortunes of individual companies. So can the incapacitation of key members of management, the discovery of a major new product, the finding of defects in a current product, a major oil spill, industrial accidents, natural disasters such as floods and hurricanes, etc. The stories of unpredictable events affecting earnings are endless.

Burton G. Malkiel. A Random Walk Down Wall Street, including a life-cycle guide to personal investing. First edition, 1973, by W.W. Norton and company, Inc.

Waterproofing and Building Structure Rehabilitation of St. Clair Reservoir. Photo by Elena