Whether by conscious strategy or default, most New Technological Corporations have adopted the strategy that requires no action: simply paying taxes on the earnings and investing them in short-term money market instruments (high-finance for ``putting them in the bank''). This strategy makes a tremendous amount of sense, up to a point, that point being, to adopt a cynical turn of phrase, ``as long as you can get away with it''.
If you believe that New Technological Corporations are undervalued by being grouped with capital-intensive ``high-technology'' companies, then you may be inclined to excuse the Great New Technological Corporation Price/Earnings Scam as a rational response to a market that refuses to see through the aggregates to the reality of their business. For what happens when a New Technological Corporation accumulates a large pool of financial assets is so remarkable and contraindicative of the concept of an ``efficient market'' that it's amazing it's still legal.
A closed-end bond fund (or unit trust) is a financial vehicle that collects money from a large number of individuals and uses the sum to purchase a diversified portfolio of bonds with given criteria of quality, composition, and maturity. Each investor owns a percentage of the total portfolio and benefits from diversification among companies and industries and economies of scale he would not have been able to take advantage of had he bought the securities directly. A closed-end bond fund is easy to value: one simply takes the total income of the fund and the market value of the securities it holds and divides by the number of shares held by investors to establish the yield and price per share.
Consider, now, the New Technological Corporation in its guise as a covert closed-end bond fund. Since the market has not yet distinguished the New Technological Corporation from high-technology corporations, it is far from realising that a significant fraction of the earnings of a New Technological Corporation come from its holdings of short-term fixed-income debt instruments. Consequently, the contribution to earnings from the company's financial assets are multiplied by the price/earnings ratio appropriate to a high technology company and so reflected in the stock price. At this writing, Autodesk, Inc. trades at a price/earnings ratio of 22, and short term interest rates of about 8% translate into a price/earnings ratio of 12.5 for short term debt. Therefore, each dollar Autodesk earns from its retained financial assets is valued 1.75 times higher than the same dollar earned by a closed-end bond fund. If this doesn't justify the word ``scam'', you must at least concede that it's an awfully kind compensation to bestow upon New Technological Corporations in recognition of the difficulties they face.
Editor: John Walker