A random Walk Down Wall Street: The Time-Tested Strategy for Successful Investing

1. The Influence of Random Events
Many of the most important changes that affect the basic
prospects for corporate earnings are essentially random, that

---

is, unpredictable. Take the utility industry, to which I
referred earlier. Presumably it is one of the most stable and
dependable groups of companies. But, in fact, many
important unpredictable events made earnings even for this
industry enormously difficult to forecast. Throughout the late
1900s, unexpected unfavorable rulings of state public utility
commissions often made it impossible for utilities to translate
rapid growth in demand into higher profits. In the 1970s and
early 2000s, forecasts were very wide of the mark as analysts
failed to predict the increased fuel costs resulting from the
sharp increase in the international price of oil. And in the
1990s, analysts failed to appreciate the extent to which
deregulation and competition would reduce the profit margins
of the telephone and electric utilities. Thus, even the “stable”
utility industry has proved extraordinarily difficult to predict.
Forecasting problems have been even more difficult in
other industries. As we saw in chapter 4, growth forecasts
made in early 2000 for a wide variety of high-tech and
telecom companies were egregiously wrong. U.S. government
budgetary, contract, legal, 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 prescription drug, a major oil spill,
terrorist attacks, the entry of new competitors, price wars,
and natural disasters such as floods and hurricanes, among
others. The stories of unpredictable events affecting earnings
are endless.