Monday, February 24 2003 8:30 am
Would you make a long term investment in an environment where what it legal and illegal can change in an unpredictable manner at any moment in time?  I wouldn't, and neither would most other successful investors.  You probably think I am referring to investments in an unstable third world country.  But I am actually referring to the telecommunications industry in the US.  Last Thursday, for example, the FCC changed the rules governing telecommunications once again, over the public dissent of its own chairman (who even provided a roadmap in his dissent on how to challenge the new regulations in court!).  As a direct result, the value of Covad, the pioneer in getting DSL services introduced in the US, dropped by over 40% in a single day!

The obvious message to stock investors is to stay clear of telecommunications companies.  That will deprive many telecommunications companies of capital, and telecommunications is a very capital-intensive industry.  The only companies that can still raise capital are those who are large enough to be included in the S&P 500 index.  Some large telecom companies have recently discovered that they can raise capital by simply issuing dilutive new shares, current shareholders be damned, knowing that the new shares will have to be bought automatically (and without benefit of any human thought whatsoever) by the enormous index funds that track the S&P 500. 

This is a very sick industry that is becoming sicker.  Regardless of whether last week's FCC decision has merit or not, the demonstrated fact that the rules can be changed to such a significant degree at any time is extremely destructive to planning and investing.  I, for one, doubt that the benefits of the change in regulations will prove to be worth the cost to the industry's investors, entrepreneurs, employees, and customers.  As FCC Chairman Powell's father said the other day in a different context: "Enough.  Enough."