Can any single industry—for example, the high-tech sector—assure investors above-average returns?
Ans: Detailed research into the sources of investment returns (Fama, Eugene F. and Kenneth R. French. "Industry Costs of Equity." Journal of Financial Economics 43 (1997), 153-93.) concludes that industries, or companies' products, are not a factor in expected stock returns. Industry effects can influence prices, but in a seemingly random, short-term way that can be mitigated in a diversified strategy. Therefore, industry effects, though they pose risks that are worth taking into account, are not a primary variable on which to sort securities for investment purposes.
Firms developing new technologies have no assurance of earning above-average long-run profits. The competitive forces in a free market work constantly to disperse the benefits of innovation throughout the economy. The retailer using new high-speed computers to cut inventory costs, for example, may reap greater economic rewards than the company who developed them. And if competition pressures the retailer to pass the resulting savings along in the form of lower prices, the ultimate beneficiary is the consumer. Even if one could correctly predict technological trends, identifying the winners from an investment standpoint becomes an elusive exercise.
Consider the birth of the personal computer industry in the early 1980s and its subsequent explosive growth. Industry pioneers IBM and Apple Computer were responsible for many innovations, yet shares of both firms have lagged the broad stock market: total return for the 20-year period ending December 2001 was 333% for Apple Computer, 1360% for IBM, and 1606% for the S&P 500 index (Center for Research in Security Prices, University of Chicago; Ibbotson Associates).