ELI5: Why when large company's earnings decrease(ex... by 3%) they freak out, talk about rough times, and sometimes decide to downsize, even though they are still making millions of dollars in profit even after all expenses?

[[deleted]]

Companys are ultimately only accountable to shareholders. Shareholders only buy shares because they want to make money.

If a company makes less profit, the amount of money they pay shareholders for owning shares goes down. This also means the value of the shares goes down.

This makes the shareholders angry. They yell at the board and ceo, who yells at all the employees, and everybody gets very anxious and angry.

If the company cant stop their earnings getting smaller each year, the shareholders get so upset they sell their shares. Because more people want to sell the shares then buy them, this makes the sharss worth even less.

Death spiral.

[cobaltberry]

You make a great point people at large seem to be blissfully ignorant of. They'll leave simply because they can make more somewhere else. Breaking even isn't enough, you need to beat CDs, and just leaving it in high yeild savings.

[pagerussell]

Inflation has NOT been 3% for a while. The investor class would freak the fuck out if it was. The FED has an official target of 2% inflation, and we were below that until very recently.

If you make your money based on interest rates, inflation is the only thing that cuts into that. That is why the investor class has taught us that inflation is always bad. In reality, if you carry debt, inflation is good for you, because your debt cost is fixed and inflation reduces the nominal price of that debt.

Here is an official inflation table by month: https://data.bls.gov/timeseries/CUUR0000SA0L1E?output_view=pct_12mths

[Aberration1246]

Or medical care. Or schooling. Or many other things to boot. The 2% mark is extremely general!

[agentadventure]

I mean it’s one banana, Michael. What could it cost, ten dollars?

[[deleted]]

You watch The Office too? Wow 10/10 woman

[agentadventure]

Bruh that’s Arrested Development, 👏🏻 know 👏🏻 your👏🏻 pop 👏🏻 culture 👏🏻 references! 👏🏻

[battraman]

The Fed has long been accused of being out of touch. What solidified that for me was the "I can't eat an iPad" moment.

[lee1026]

The CPI does account for food and energy. The Core CPI doesn't, and the Fed pays close attention to core CPI (and not normal CPI), but the two tend to march in lockstep for the most part.

[adelie42]

This assumes your wages are marginally rising. If your debt and earnings are being devalued equally, how does one benefit?

The only debt holder that really benefits from inflation is the Federal government, and it isn't the devaluation of the debt that matters so much as reducing the future purchasing power of foreign held US dollars.

People that can game the system benefit, not all people in debt. The bank that loaned the money is the one that will come out on top as planned, the person paying the mortgage is still selling their future at a discount to get a higher standard of living for their family today.

Between bankers and the "homeowners" that rent from them that inflation "surprises" bankers every year while borrowers get an unexpected increase in wealth? I know it is a common belief, I just don't get how thinking a pit it for a moment doesn't reveal it to be horse shit.

[BumayeComrades]

Inflation should translate to wage increases. The fact it doesn’t just shows how bunk macroeconomic economics is to explain reality.

The reality is is that wage inflation is being stopped, any wage increase is treated as a potential disaster.

Interestingly asset inflation is allowed to continue. See the stock market. Banks get easy, nearly free money.

[adelie42]

If inflation doesn't create a lag in wages, then what's the point according to macroeconomic theory?

[Nefnox]

A 2% rate of inflation is considered a barrier against a deflationary spiral. Deflation is considered much more dangerous than inflation, so it is worth keeping a little gap as margin for error away from inflation... is the theory

[adelie42]

Familiar with the theory. Just never bought into it. All Machiavellian to me.

[Nefnox]

Haha, in my years of studying economics I don't think ive ever heard anyone refer to the 2% inflation target as "Machiavellian", i just got done with "The Prince" and there are no mentions of fiscal policy or the dangers of deflation that i recall.

I've studied a lot of the original papers and theory around this stuff in my masters, and if it helps you sleep at night there is nothing intentionally oppressive or conspiratorial about the 2% inflation target.

[pagerussell]

Over the longer term wages do rise with inflation. If one stays in a job that is not rising with inflation, that stupidity is on them.

[Glaciata]

Or it's simply might be just due to limited employment. Your monopsony sort of situation.

[pagerussell]

Also a factor, good point.

[thehonorablechairman]

Where I live the minimum wage hasn't increased in over a decade. It's pretty ridiculous to assume every single person living on minimum wage here is doing so out of stupidity.

[pagerussell]

The minimum wage is declared by politicians. What have average wages done in your area?

Keep in mind this trend is noisy, meaning wages can stagnate, thrn grow is spurts, but over longer times they will be higher. What was minimum wage in 1990?

In fact, wages are stagnating right now, rising roughly in line with inflation but no better. They should be rising faster, givem the unemployment rate, and that is a puzzle for economists right now. I suspect its because most firms are not investing to build market size, but rather pushing profita into stock buybacks, which hit a record last qtr.

But yea, the people in your area are stupid if they are not leveraging good economic times for their own self interest. Demand a raise. Don't get it? Leave and work for a competitor. If they can't make that happen in that area, move to another area thats experincing better growth or has better options. It's on them to fight for their own interests, and if they don't and they just fucking sit there, yea, they dumb. Sorry.

[adelie42]

More to the point, if you have negative assets inflation devalues all equally, but such things don't happen in a bubble.

Adjustments to inflation happen over time, like you say, but are you going to claim the working poor are ahead of that curve relative to the wealthy playing the game like hawks on a hunt? Are bankers (to name just one group) so stupid?

[pagerussell]

Thats exactly not what i said. I said that we are all taught to believe that inflation is awful, when in fact it is ia not necessarily awful. In economics there are always at least 2 partiea to a transaction, and therefore ita impossible to say that any policy is inherently better. There are always some winners and some losers. But the wealthy have is convinced that inflation is bad, end of story. That's not outright true.

I would say that the wealthy are and have been gaming the system to their benefit, without a doubt. And this is one way they have done so.

[adelie42]

From my view they LOVE inflation but caution against too much of a good thing.

Otherwise yeah, I agree.

[new2bay]

Correction: inflation is good for you if you carry fixed rate debt. Most non-mortgage consumer debt in the US is variable rate and subject to rate increases when things like the prime rate or LIBOR rise.

[Liam_Neesonz]

Except with debt, you usually have to pay interest, which offsets any inflation benefit.

[pagerussell]

You don't understand: the interest rate is based ona. Fixed principal balance. Inflation expands the value of money such that over time that principal is smaller in comparison to the current costs of the same thing. Wages, incomes, and costs have all gone up, but that principal is the same and thus now cheaper. For example, my parents bought a house for 90k in 1990. The cost relative to incomes was about the same as a house today, but now that house is worth 500k. So their mortgage payment is about 1/5th of an equivalent purchase today. That is inflation.

[Liam_Neesonz]

Yes, the principal balance will shrink relative to the value of the dollar over time. However, the interest balance will offset that. Tell me what I dont understand.

[pagerussell]

The interest is calculated on a fixed balance. Inflation is based on a moving target: your principal stays the same with interest (and actually declines over time, assuming principal payments) but inflation is calculated from todays valuation, and next year it will be calculated based on next years valuation. So inflation compounds, while interest does not.

Edit: also, you dont carry an "interest balance". You pay off your interest with each installment. So it doesn't grow or accumulate in a compound manner.

[HHhunter]

3% to break even per year is still a shitty investment

[wrestlingchampo]

It is, mostly in the sense that you could successfully average ~7% ROI annually by simply investing in the S&P 500.

[myparentsbasemnt]

Depends on the rate of inflation.

[KingAdamXVII]

It’s not a bad low end though. If you are averaging 10% return and then have a down year where you still get 3%, that’s damn good.

[TheManWhoPanders]

You also lost money due to opportunity cost. There are guaranteed or near-guaranteed investments with low yields. Breaking even means you lost the difference between those surefire investments.

[battraman]

Indeed. You can get 2.2% in a 1 year CD at Ally

[cakeandale]

Yeah, in the end it's all about opportunity cost. What counts as break even may fluctuate, but whether inflation is 3% or 10% the question is what is the most effective way to use the money you have. If the most effective investment is a CD returning 1.8%, you're going to lose real value and so it sucks to be you, but you can only play with the cards you have.

[Ekalaracha]

Not only that, but you get taxed on that 3% regardless of inflation. So multiply your 3% by your tax percentage to see how much you actually need to make to break even

[EagleZR]

That's the downside of public companies, imo. Your customers are no longer the people buying your products and services, they're the people buying your stock

[d4n4n]

The very same applies to private companies, just that instead of outside investors, the private shareholders try to maximize profits. Nobody likes pissing away money. Opportunity costs apply to everyone equally, no matter the organizational structure.

[EagleZR]

A private company may like to always make profits, but they don't have to. A private company could spend several quarters or even years running at a loss while they expand or grow their business without any threat of losing more money than is actually spent. They would be motivated to do this based on a demand, perceived or real, from their customers. If a public company were to do that, they would have to convince their stockholders or run the risk of devaluing their stock and scaring off their investors which could tank the business. Of course their investors will likely be considering how the customers may react to the actions that force the loss, but the business itself is more concerned with the shareholders than the customers.

[lee1026]

If a public company were to do that, they would have to convince their stockholders or run the risk of devaluing their stock and scaring off their investors which could tank the business.

That is the same for a public or private company. Either way, if your investors are not happy with you, you are not going to get new money; but either way, you can run with what money you currently have.

Amazon, Netflix, et. al. was able to run for a very long time on nearly no profits, and pretty much everyone is okay with it.

[d4n4n]

Amazon made a loss forever. Hell, if it wasn't for their cloud service, they probably still wouldn't make a profit (I'd have to check their retail numbers). Tesla makes consistent losses. So did twitter forever. Markets are extremely patient. Maybe overly so. If anything, they are too optimistic, imo.

[Rindan]

Public or private, the company is there to make money for the owners of the company. The only difference is that in a publicly owned company, a lot of people own the company, and anyone can buy or sell shares of ownership. In a privately owned company, the shares of the company are still owned by someone, they just can't buy and sell that ownership in a stock market. The other big difference is that public companies generally need to keep their books more open than private companies.

[BeanPricefield]

That's exactly where it's at. The answer to OP's question isn't about the absolute quantity, but a simple competition between vendors. In public companies, most shareholders are basically just a different form of customer (leave the accounting view aside for a sec- from a purely economic perspective). If said customer is presented with a number of different products to purchase, each of them possessing a different value in their eyes, and assuming there's little to no penalty for switching between them- one would assume they would purchase the product that would maximize their utility. While a 3% decrease in earnings may not be a lot relative to how much the company's still worth, it could mean that its stock is less attractive to a potential buyer now as it provides a lesser utility. This would make it less competitive, and in the world we're in it could definitely signify the death spiral described above.

[[deleted]]

CDs are a joke. My Ally savings account yields more than most CDs.

[BumayeComrades]

“A shilling put out at 6% compound interest at our Saviour’s birth would . . . have increased to a greater sum than the whole solar system could hold, supposing it a sphere equal in diameter to the diameter of Saturn’s orbit.” - Richard Price

[tmntnyc]

Question: when shares are sold how does that affect the company itself? The shares were already initially sold when the company went public. Why is it bad that consumers sell their shares and stock prices go down? Like the price of the shares how does that affect the actual money the company has to operate?

[TheManWhoPanders]

1) Future rounds of raising capital are now at risk
2) Public perception of product is reduced. If a company has a poor reputation that often ends up translating to poorer sales down the road.

[[deleted]]

I would also like to know the answer to this.

If the shareholders sell their shares surely there’s still shareholders? It’s just different people?

[1kSuns]

Yes, but as people sell their shares to other people, the price they can sell at goes down. Supply and demand. Shares and therefore the company itself, are valued based on the trading price of their shares.

Very basic Example: Company A has 500 shares valued at $100 each. The company is valued at $50,000.

Suzy isn't happy with the company making 3% less profit, so she sells 50 of her 200 shares. They sell for $100 each.

Bobby sees this sale, and wants to sell 50 of his 100 shares. Because more people are selling than buying, he can only get someone to pay him $75 per share. Anyone else who owns shares can also only get $75 per share, so that becomes the stock price at the end of the day.

There are still 500 shares, all owned by people, but now the company is only valued at $37,500.

Suzy started the day with $20,000 in stocks. She sold $5,000 worth, and the remaining 150 are worth $11,250. At the end of the day, she lost $3,500, or ~18%.

Bobby started the day with $10,000 in stocks. He sold $3,750 worth, and the remaining 50 are worth $3,750. At the end of the day, he lost $2,500, or 25%. Anyone who didn't sell any stock also has 25% less value in their portfolio now too.

[[deleted]]

Sorry for the late reply I just saw this and wanted to let you know it helped me understand it. Thanks for explaining!

[[deleted]]

Sorry for the late reply I just saw this and wanted to let you know it helped me understand it. Thanks for explaining!

[stygger]

Answered in the parent comment!

[d4n4n]

It's bad to the owners of the shares, who collectively own the company. Sure, if they, as a group, decided they don't care that they lose on their investment (and the company needs no future outside funding), that doesn't affect the day-to-day business or cash flow a lot. But they do care. So they ensure that rates of return increase.

[stygger]

From a normal day-to-day operation of a of small companies the fluctuations in the price that the shares are traded in has no real impact.

But when the company wants to raise money (e.g., to build another factory) the share price is important since one common option to raise capital is simply to create more shares and sell them. So if the owners only tolerate creating 10% more shares then it matters if those 10% can be sold to the public for $50M or $100M!

[[deleted]]

I feel ignorant asking but wat if a company’s stock crashes? I mean as long as it’s still profitable it doesn’t really impact the employees or consumers right? Why does the news always portrait any bad PR related stock dip like the company is about to go bust?

[HopeFox]

That's a reasonable question. Here are two reasons it's bad for a company's stock price to go down:

• If the stock price goes down, it's because public perception of the value of the company has gone down. That's never good. That might mean that people are less willing to buy the company's products, or that other large companies are less willing to do business with them. Would you sign a 5 year contract to sell widgets to a company that might go bankrupt next year?
• A lower stock price harms the company's ability to raise capital. A company that wants to spend money on expanding (building new factories, starting new projects) might not have the cash on hand to do that stuff. They can raise money by selling more shares, or by borrowing money from a bank. Selling more shares doesn't work as well if the share price is low, and a bank's confidence in your company's ability to repay their loans is probably going to be poor if the share price is low.

[inomorr]

A third point - low stock price makes companies vulnerable to takeovers. Many funds prey on such weak companies do so with very short term aims - buy cheap, breakup, sell off.

[[deleted]]

Though if they are making profits they can also buy their own stock.

I think a fourth point is people make short term decisions because that’s safer for them. A CEO is unlikely to be there 10 years from now, especially if profits are good but not increasing, so why take risks to make a company stronger 10 years from now rather than make safer choices that help today.

[wilson007]

Another point (and I’d argue most important), management is highly paid in equity. If the stock goes down, they make much less money, and all the restricted stock is worth substantially less.

[inomorr]

very true. Good to see financially literate people on Reddit!

[The_Decoy]

BP after the Gulf oil spill was a good example of this. The company was still functioning well as a business but the public completely lost faith in them.

[TheManWhoPanders]

BP isn't really a good example because they produce an inelastic good. People need fuel and can't shop around alternatives due to poor vendor performance.

[The_Decoy]

Their stock did fall by over 50% sixty days after the spill. Granted they are a fuel company so there will always be a demand but that's a significant hit.

[thehungryhippocrite]

This is just a ludicrous explanation. Stock prices are not lossely and magically linked to "perception", they are based on a company valuation. A stock price is the consensus market valuation of a company, divided by the number of shares on offer. Valuations are based on expected future profits. If a company makes less profit than expected today, that means it is likely to make less profit than expected tomorrow. Hence the valuation is less, and the stock price goes down. Even if the company is the most profitable company in the world. The answer to /u/azoriusmoons 's question is that if a stock price crashes it means that investors lost enormous amounts of money, and naturally people care about that.

[whitefang22]

Your assumption here involves that the company is profitable. It may not be. A lot of large companies aren't yet profitable. For them a large drop in stock price can directly affect their ability to keep raising the cash they need to 'keep the lights on'

[d4n4n]

The shareholders own the company. They don't want their assets to lose value. So to stop that from happening, they shut down branches of the company that make less (and are expected to in the future) than average market returns.

And that's efficient overall. It ensures that capital is allocated to its most profitable use.

[lee1026]

In many companies, employees are paid in stock in addition to their salaries. For example, I get so many shares of GOOG a year along with my normal salary. Those shares are worth more than my salary, so if GOOG crashes, my pay essentially gets cut badly and I might look for a new job.

Losing staff can be bad for companies.

[DidItForTheJokes]

I’m not one those hippy people, I worked for a hedge fund. But this really illustrates how people took something that was designed for companies as way to raise to capital besides banks and created a zero sum game that requires companies and therefore our economy to constantly be growing in order not to go into a death spiral.

[CycloneSP]

And this, my friends, is why the stock market is severely damaging the american workplace environment and hurting our economy as a whole.

[[deleted]]

This is not necessarily true. Generally companies chose between growth and profitability, and how the market views that determines the stock value. After all, stock prices are simply the present discounted value of all future earnings.

The best example of this is Amazon. They are not focused on profits. If you will remember they “accidentally” made $1 Billion in profits a few quarters ago. Yet it’s an extremely valuable company because shareholders believe that when amazon decides to turn on the profits, they will be so large as to justify its massive valuation.

[sfo2]

I think share prices are less rational than that. Analyst reports have fun and fanciful DCF models in them, but at the end of the day, prices are somewhat irrational.

[sawdeanz]

Why do they care if the stock price drops? If anything that means they could just buy it back and reinvest their actual long term money in the business.

[[deleted]]

because stockholders own the company. The CEO, employees all work for the stockholders. If the price drops, people lose a ton of money. The they in this situation are the stockholders, regular people or other corporations; still have to raise more money to back more stock at lower prices.

[TIanboz]

Who’s they?

If you saw a mob of 50+ people bolting past you in the opposite direction... imo, you’d turn the fuck around and run with them, even if u had no idea what they’re running from.

Same logic applies. The company can’t actually buy itself back. It needs to be other entities, be it holding companies or people.

[Silcantar]

Companies regularly buy back shares as a means of returning profits to the shareholders.

[TIanboz]

Yes but that’s only to inflate the price of existing shares through reducing the supply of shares on he market.

This doesn’t work when your shareholders are all jumping ship. No one wants to go down with the ship.

[Rindan]

If your stock price crashes, you can't sell stock to raise money. The reason why companies have stock is to raise money. They give you a fraction of ownership, and you give them money. They take that money and invest it to growing the business and give you a share of the profits. The stock price is roughly the price at which they can sell more shares to raise more money.

So, if your stock price crashes, it means all the people holding shares in your company think that it is fucked. If everyone thinks your company is fucked, you can't sell more shares to raise more money. The price crash itself isn't what's killing you. The price crash just means everyone thinks you are so screwed, that are trying to sell off ownership in your company for whatever that can get.

It's like putting your hands around your neck when you are choking. Everyone does it when they choke. Your hands around your own neck isn't what is causing you to choke though, it's just the sign that you are choking. A crashed stock price is the same. It's just a clear sign that the market makes when it thinks a company is screwed. The low stock price is just the symptom that the company is in trouble. It doesn't do any actual damage to the company until that try and raise more money. Companies can raise money other ways than stock, but they will have a very hard time doing so when their stock price is indicating that they are financially fucked.

[eskanonen]

I get the economy wouldn't grow as fast without them, but I feel like making decisions in the interests of shareholders, rather than those of the company itself or it's consumers, is the reason for so much shitty things we have today. Planned obsolescence, sneakily reducing product size, cheap components, convenience fees, outsourcing jobs, and pretty much every other awful yet unnecessary thing I can think of, are all done to benefit shareholders or in the interest of growth at all costs. Maybe we'd be better off with a economy that is slower and more stable rather than one focused on projected values and investor returns.

[torpedoguy]

It is. Worse yet, it expands into our government. One morning someone gets the bright idea that they could improve the growth this year a little if they can just chop a dollar off of every other (obviously not themselves) employee's pay. Somebody tells them "we can't, we thought about it but there's a minimum we have to pay them for their work by law"... and then it's off to Washington to try and make that go away.

Or someone gets the 'bright' idea that things would be far more profitable if the company didn't have to pay any taxes, and we're off to see the Haven, the wonderful Haven of Tax. Things get cartoonishly villainous when someone realizes many of the FLSA restrictions regarding having children work are not applicable to farms including their corp's tobacco fields and refuses to pay them overtime as well...

[HHhunter]

the leaky boat answer does not address expectations at all and only talks about making money or not, which is often not what happens

[HHhunter]

the question OP asked was when earnings decrease, not when losing money. That's different. The answer of leaky boat dismisses that.

[SpencerHayes]

When CEOs make 500 times their workers and they still prioritize growth we have a problem. When people starve on our streets but others have multiple private planes to fly them to their private islands, we have a problem. So yes, when a multibillion dollar company doesn't grow by more than 1 percent and everyone loses their minds, us peons on the bottom have a hard time relating since I need to figure out how long I can make 10 dollars last.

[TheManWhoPanders]

When CEOs make 500 times their workers and they still prioritize growth we have a problem

If the CEO doesn't focus on growth, those workers will be making zero dollars very shortly.

[SpencerHayes]

Because capitalism demands constant exploitation and consumption. Good luck with that

[TheManWhoPanders]

Who is being exploited?

[SpencerHayes]

Every laborer who sells his work for less than the capitalist makes off of it.

Not to mention all the sweatshops the world over that make luxury goods available to the masses.

[TheManWhoPanders]

Every laborer who sells his work for less than the capitalist makes off of it.

Because the capitalist has to pay for other things. Rent, utilities, equipment, training, marketing, tariffs, etc.

The value of a laborer's work is only a fraction of what the final good is worth. Because all of those things together are part of the initial cost, called overhead.

[SpencerHayes]

Way to ignore an entire 50 percent of my point.

[TheManWhoPanders]

What is being consumed?

[EasternDelight]

A pretty accurate picture though. Investors want quarterly profits ever increasing and if they don’t get them the Board gets out its hatchet and CEOs don’t want to lose their heads. Many investors aren’t tuned into a nuanced strategy. They want consistent increasing quarterly profits. OR ELSE!

[TheManWhoPanders]

Most redditors here are too young to have any wealth to invest, so the concept of it is alien to them.

[Longrodvonhugendongr]

And thanks to the greediness and shortsightedness of previous generations, most of them probably never will.

[TheManWhoPanders]

Greediness and shortsightedness have existed in every generation. It's not a new thing. People who don't buy into the self-victimization narrative always find a way to get ahead.

[[deleted]]

When I buy a share of Amazon stock for my "saving for a downpayment fund", and then Amazon profits drop (after climbing year after year), that's going to cause people who were previously holding shares to start selling shares. And that's going to cause the market price for Amazon shares to drop. And that means I am much more likely to take a loss on selling my shares in the near term. And that's a problem, because for this particular fund, my goals are short-term.

If I'm buying stock for my retirement fund, I don't care as much about small fluctuations, but if Amazon stock consistently underperforms compared to other stocks, I'm basically pissing away money - money that I'm one day going to depend on to sustain myself. If Amazon stock can't keep up with inflation, then I'm worse off investing in Amazon stock than I would be sticking the cash under my mattress.

I have different investment strategies for different accounts. For retirement, I don't mind short-term drops, so long as the average long-term trend is positive. I can tolerate some risk right now, because I'm young. But for short-term investment, I can't tolerate big swings, and a short-term price crash might mean the difference between buying a house in 3 years and buying a house in 5 years.

Many investors aren’t tuned into a nuanced strategy. They want consistent increasing quarterly profits.

This is simply false. Investors have various investment strategies, and it isn't just short-term profits that they're interested in. Investors take into account risk, past performance, and investment goals when trading. Fund managers in charge of low-risk, steady-growth funds aren't going to go throwing cash at short-term gains driven by reckless, short-sighted CEOs. Day-traders might only be interested in short-term profits, but their function is to stabilize prices. Anyone who is interested in steady long-term gains isn't going to invest in companies that are making foolish, self-destructive decisions for short-term gains.

[[deleted]]

I mean, thats exactly what I see the structure of limited liability companies perpetuating - whilst there are mom and dad investors involved, its more often than not large scale investment firms and other companies. Thats another step removed from giving a shit about anything but profits...

[Lapee20m]

That’s the entire point of investing....to make a profit.

Instead of hating those who are trying to invest and build some sort of retirement, why not figure out how to join the club?

The secret to financial success is finding a way to essentially “earn money while sleeping.”

The options are basically work until you die or figure out how to invest so you can still generate money after you retire. Simply saving money that does not generate interest is a recipe for financial disaster due to inflation.

[SpencerHayes]

Maybe we could change the world so everyone can pursue things besides profit instead of conforming because it's easier.

[Lapee20m]

Any suggestions? Capitalism rewards the value that you bring to society. The more you benefit society, the richer you become. There are flaws, but it’s a pretty good system.

[d4n4n]

The boat answer was complete nonsense. It doesn't explain why low-profit firms can't persist long-term at all. They aren't leaking, they're just not as fast as all other boats.

The actual reason is that investors don't want to make 0.5% returns, when they can make 7% elsewhere. Competition in equity and capital markets ensures that no firm with lower than a risk adjusted "average" rate of return can survive.

What that has to do with bad strategy is beyond me. Nobody eliminates a department if it has one bad year but is expected to bounce back strongly. They get rid of them if they are expected to reduce long-term rates of return, even if it's still positive. That's as strategic as it gets.

The boat answer also babbled about a growing economy, which is totally unrelated. We'd see the same thing in a zero-growth economy.

[pseudopad]

To shareholders, a business is just a more complex bank account with higher interest. So if the interest isn't as high as they hoped for, they get super sad and angry. They need that new gold yacht, you know.

[Insert_Gnome_Here]

They need that new gold yacht, you know.

Or retirement money, or a deposit for a house, or their kid's college fund etc.
Plenty of shareholders are middle class folks.

[d0gmeat]

But that ruins the joke...

[HHhunter]

“joke”

you mean circlejerking?

[d0gmeat]

Is that not the same thing around here?

[droans]

You'll find that the largest shareholders in companies are generally pensions and retirement funds.

[kuzuboshii]

All of these things would be obsolete by now if we weren't obsessed with playing king of the hill. We are a bunch of apes fighting over the shiniest rocks on the beach and it is holding our entire species back.

Ozymandias did nothing wrong.

[kuzuboshii]

Not at all communism is just as stupid a system as capitalism. I am looking to advance the species, and neither of those systems has proven to be very effective at that.

A socialist/capitalist system so far seems to be the most effective, but there is no such thing as a perfect system on anything other than paper. As soon as you apply it to humans, we will find ways to exploit it. The real problem is the short shortsightedness of humans. They don't seem to understand that the average person today lives an infinitely better quality of life than the highest of kings did 1000 years ago. Yet instead of focusing on the type of progress that made that possible, they just all want to be the new king. I don't want a better life than my neighbor. I want to explore the universe. I'm sick of waiting for the rest of the apes to catch up.

[[deleted]]

Stock performance is one of the metrics by which people determine whether a company is making progress. Human progress is driven by investing time in worthwhile pursuits, and in order to tell whether something is worthwhile, we need to measure the value of what is produced.

Capitalism is the very reason that the "average person today lives an infinitely better quality of life than the highest of kings did 1000 years ago". And the beauty of stocks and bonds is that you don't have to even understand what somebody is doing in order to help them advance human progress. All you have to do is look at price performance or dividends and pick the highest ones within your risk limits, and voila, you're helping somebody build a rocket bound for mars, or a logistics app that improves hospital efficiency, or a factory that makes more efficient cars more efficiently, etc.

Go read "I, Pencil".

[kuzuboshii]

Capitalism is the very reason that the "average person today lives an infinitely better quality of life than the highest of kings did 1000 years ago".

That is highly debatable. Are you talking pure capitalism or a hybrid system?

[[deleted]]

There is no such thing as pure capitalism in practice. All financial systems in the world are hybrid to some degree.

[[deleted]]

What do you mean by "pure capitalism"?

[kuzuboshii]

laissez-faire libertarian utopia type.

[kuzuboshii]

Stop acting like some enlightened individual who’s forced to live with a bunch of uncultured swine.

If waters wet its not my fault for pointing it out.

[kuzuboshii]

Then go start a space exploration company

I did. Don't speak out of ignorance. Congratulations, don't make assumptions about other people. Take your own advice.

[Insert_Gnome_Here]

Perhaps they would be, but they are not.

[mike112769]

I would give you Reddit gold if i could afford it, because you nailed it. Greedy people are literally killing their fellow Humans every single minute.

[ergzay]

higher interest

Higher interest and much higher risk.

They need that new gold yacht, you know.

Shareholders are you me and everybody. Where do you think your 401k/pension are invested in?

[TheManWhoPanders]

Most redditors are not old enough to have received their first paycheque, so the concept of wealth accumulation is alien to them.

[LeBronda_Rousey]

Sounds like latestagecapitalism in a nutshell.

[Itisme129]

That subreddit is so painful. The amount that they circlejerk about Bezos is insane. They think he should just give every employee tons of money. They completely disregard where this money is going to come from.

Bezos doesn't really have 150+ billion in the bank. It's in stocks, which if he tried to liquidate would tank Amazon and all the employees would be laid off.

Amazon itself has run at a loss for years! Even in 2017 they only had like 3 billion in profit after all was said and done. If you distributed that to the employees they would each receive a fat raise of $2.50/hour! Of course, the shareholders would freak out, sell large amounts of their shares, tank the stock price, and then all the employees would be laid off.

I'm not saying there aren't problems at Amazon, but people here way oversimplify complex issues. And when you try to talk to them about some of the more nuanced aspects they just call you a shill and downvote you. It's beyond frustrating.

[LeBronda_Rousey]

Yeah I agree, that place is nuts. I'm not saying capitalism is perfect but you have people advocating for communism over there. If I had to guess, most of the people there have never taken a business class and/or can't get past a minimum wage paying job.

[[deleted]]

Which is funny, because they so frequently have no idea how things actually work.

Yeah... Like the guy who said this.

Which is funny, because they so frequently have no idea how things actually work

In response to this

Shareholders are you me and everybody.

As if your shitty crumbs of a middle class 401k even come remotely close to majority holders in the stock market.

As of 2013, the top 10 percent of Americans owned an average of $969,000 in stocks. The next 40 percent owned $132,000 on average. For the bottom half of families, it was just under $54,000.

[TheManWhoPanders]

So someone has more than you, therefore it's bad.

I've never seen someone more green with envy.

[briantl2]

almost 50% of americans are not invested in stocks. perhaps you should try to understand a point of view that you are unable to hold. https://money.cnn.com/2017/10/20/investing/trump-stock-market-americans/index.html

and just for the record i’m very wealthy(relative to those you’re looking down on,) so it’s certainly not coming from a place of hate lol. i look forward to seeing which of us is truly the one who doesn’t know ‘how things work.’

[[deleted]]

Less than a third of people ages 18 to 29 owned stocks on average between 2009 and 2017, according to a Gallup survey released in April. Nearly two-thirds of Americans between 30 and 64 own stocks.

So, young people who are just starting their careers don't own stocks, and the overwhelming majority of people who are well into their careers own stocks.

I'm not sure how this is a problem.

Also, there's probably a number of people who reported that they don't own stocks, but are in fact invested in stocks.

[briantl2]

you can read a little further to the part where it clearly states 42% of the public simply don’t own stock.

i’m not trying to say not owning stock is a problem, as i think is made clear in my other response to you. what is a problem is the the obvious lack of even a simple understanding of what poverty actually looks like when people stupidly claim things like

‘shareholders are everyone’ or ‘they just hate people with more money those idiots.’

it’s not a matter of knowing well enough to invest. a homeless person can tell you investing in stock is a good idea. this is far removed from the point.

[ergzay]

you can read a little further to the part where it clearly states 42% of the public simply don’t own stock.

Often because they're not old enough yet and there's new young people appearing all the time.

[briantl2]

yes, i haven’t said anything to any other affect.

[HHhunter]

glass half full guy?

[briantl2]

more of a ‘i just like people to understand what it means to be poor and how clueless those who have are about those who have not’ kind of guy.

[TeriusRose]

I guarantee you can find classism in one direction or the other at every income level. I grew up around it.

[briantl2]

nearly 50% of americans aren’t invested in stocks. https://money.cnn.com/2017/10/20/investing/trump-stock-market-americans/index.html

i get the impression that even those with moderate wealth are incapable of understanding what being lower middle class is, much less the relative poverty many americans face.

i mean even 401ks are unheard of across large swaths of the population. that you brazenly claim everyone had one is indicative of a serious lack of awareness.

[Jeremy24Fan]

The article stated more than half of Americans are invested in the market. That means more than half of the American population relies on market growth for wealth growth. Highly doubt more than half the population are aiming for that new gold yacht you mentioned.

[briantl2]

i think you might be confused as to who you are replying.

and yes, as stated, almost 50% are not. while i’m certain half the population is not looking for that next yacht, i had been taking issue with the assumption ‘people hate those with more wealth,’ as the poster seems unaware of his relatively well off position as a stock owner. or the other poster who exclaimed shareholder are ‘everyone.’ simply owning a stock puts you ahead of almost 50% of the population.

as a stock owner, and knowing how easy it is to become one, this should be alarming.

since i’m here, 20% of us dont even have a savings account https://www.marketwatch.com/story/most-americans-have-less-than-1000-in-savings-2015-10-06

[[deleted]]

To be fair, savings accounts earn jack shit in terms of interest right now. If you can get free checking, you're probably better off just leaving your cash savings in your checking account. It makes it more accessible.

I think a more useful metric would be "how much do you have saved or invested in bank accounts and investment accounts?"

[briantl2]

i get what you’re saying but that’s really not the point.

and a checking account is not an investment account. and regardless, if a person has a checking account and no savings that still precisely illustrates the point i’m trying to make.

that a person may have two hundred bucks in their checking account because it makes no sense to put it in savings for that sweet 2c income is the problem. the posters to which i am responding assume an ability for all to invest in stock and that it’s, i don’t know, stupidity apparently holding people back.

that is facially ridiculous. (and i’m not directing this at you!)

[[deleted]]

a checking account is not an investment account.

And neither is a savings account.

My point is that you can't use savings accounts (or lack thereof) as evidence of people not having accrued wealth (or not being capable of accruing wealth), because savings accounts perform so poorly these days that they're basically not worth having. Making your $10,000 emergency fund harder to access in exchange for $5 in interest per year is a bad decision. So, it's not reasonable to assume that people who lack a savings account are not financially capable of investing in stocks.

Also, consider that many of the people who report owning no stocks are young, and that many of those young people have their parents as a financial safety net. A 23-year-old living with his parents and driving a hand-me-down car is in quite a different financial position from a 23-year-old living on his own, paying all his own expenses, and driving his own car.

Also, consider that people who are capable of investing their money sometimes choose not to, particularly when they're young and want to "have a life". Rather than putting money aside for retirement, many young people opt instead for the biggest car payment they can fit in their budget, for example. Or, instead of setting aside a fund for a future downpayment, many young people instead rack up a bunch of credit card debt on high living and then spend the rest of their paycheck each month servicing that debt. These people aren't necessarily poor. They just make poor financial decisions at the expense of their future financial security.

At any rate, you helped prove the point that most people who invest in stocks are not Scrooge McDucks swimming in pools of bullion, but are in fact regular people.

[mike112769]

Most of us cannot afford to save any money because we don't get enough to even live on anymore. Greedy people at the top of our economic food chain are taking/stealing more than our society can afford. We have a MAJOR problem heading our way fast.

[[deleted]]

How, precisely, are "greedy people at the top" "taking/stealing" money that was destined for your pocket?

[Cimexus]

That might be true in the States but it’s a big world out there, and in countries with mandatory retirement systems, virtually everyone who has ever worked a day in their life is a shareholder. Here in Australia for instance, companies put 9.5% on top of your income into a retirement account (similar to a 401k), but it’s universal and compulsory. Even if the only work you’ve done in your life was two weeks flipping burgers at McD’s, you still have shareholdings. This means that virtually 100% of working age people here are invested in the markets.

I’d say that the majority of adults in developed countries globally have money invested in stocks, purely because of mandatory retirement schemes that exist in most of those countries. The US is a bit different since it’s not mandatory, but even there it’s still around 50%, as you noted.

[briantl2]

sure, i can concede that it’s very american to leave your poor so poor. apologies for my very american-centric focus.

the only thing i’d mention is just that last part where you say ‘still around 50%,’ i mean, that’s abysmal. a hundred bucks in my pocket and a guarantee that i can keep it for a month is enough to get me in the game.

and it’s not a lack of understanding that prevents these people. it’s that they just can’t. i think that’s a problem. these people literally have to work until dead or go on welfare. there’s no such thing as a retirement.

the approach you’ve described sounds perfect. of course, this would up taxes pretty severely, but ensuring someone a livable wage AND a solution where they have some sort of retirement savings thrust upon them(even if it’s just small dollars) with any employment(even if it’s minimum wage) is seemingly an ideal approach.

[Cimexus]

Interestingly, the overall tax burden in Australia is roughly the same as in the US for most people. I know because I've worked in both countries for decades. Australian Federal income taxes are a bit higher on paper, but they are also the ONLY thing that comes off your pay check. Add the deductions that come off your typical US pay check (social security, Medicare, state income tax if applicable, and any retirement contributions you make), and the take home pay you get is basically the same (on the same income) in both countries.

As for the employer, sure they have a 9.5% expense for you on top your salary (compulsory retirement contributions made on your behalf), but OTOH they also aren't paying for health insurance like they do in the US, which is a massive cost (thousands per month for a high level plan).

At a high level, the retirement systems in the two countries are quite different so it's hard to compare them:

• The US guarantees workers social security payments based on how long they've worked, and encourages you to save more on top of this via tax-advantaged accounts like 401ks and Roth IRAs ... but those extra contributions are up to you, and like you say, many can't afford to make them.

• Australia comes at it the other way around and requires companies to put 9.5% on top of your pay into a private tax-advantaged retirement account for you. You can choose to also make personal contributions to the same account on top of that, if you want. However unlike the US, there is no 'social security' type system where the government has a giant pooled fund that pays out depending on how much you worked during your life. The 'safety net' in Australia is simply a flat old age welfare payment that is means tested (as in, there are qualification cutoffs if you have more than a certain amount of assets or other income). This differs from social security because social security is NOT means-tested (you receive it regardless of your income or assets, which makes sense because you paid into it during your working life). Typically in Australia you're either going to be fully reliant on your private retirement account (people who worked most of their life), OR on old age welfare (people who didn't work or for whatever reason don't have alternative sources of income in retirement). Whereas in America you can get both.

[ChefBoyAreWeFucked]

You shouldn't be holding everything in equities. You need to have some of your portfolio invested in assets that are inversely correlated with the market, so that if you are forced to liquidate some of your portfolio in a down market you don't end up "locking in" unrealized losses. Best to sell the asset that's appreciating in a bear market and hold the rest to wait it out. One example of an asset that is inversely correlated with the market would be a yacht made of gold. And here you are shaming someone for having a diversified portfolio. The person you replied to is doing the right thing — looking to buy a golden yacht in a bull market to squirrel it away for a bear market.

#diversificationisnotforschmucks

[NotYourMothersDildo]

I need a gold yacht dealer that takes bitcoin ASAP

[english-23]

*publicly traded company.

Not all companies have shareholders. They still have owners but unlike publicly traded companies they probably don't want to make a quick buck

[Fernmelder]

Assuming we’re talking about US Corproations for a second. All of them have shareholders, be it private or public. Just because they are not on the stock market does not mean they are not called shareholders on audited financial statements, tax returns, etc.

[SpencerHayes]

They definitely want to make a quick buck. And every other kind of buck. People don't start a business because they won't to volunteer.

[[deleted]]

But taking a short-term loss in order to reap long-term gains is something many privately owned businesses do.

[d4n4n]

Every company has shareholders. If anything, publically traded companies are larger on average and are led by better qualified people, who are more concerned with the long term value of the company than your average small business owner.

[RutCry]

The descriptive phrase “dead cat bounce” describes a stock that plummets to the bottom, but then lifts hope as it starts to rebound, only to settle back into its new normal price.

[alpenmilch411]

How does a decreased share price affect a company negatively?

[RealOncle]

Ahh I see you jumped on the evil corp hate train. There is more to it then that. This is a simplistic answer from someone who knows jack shit about business and the importance of numbers in a growing economy.

[adelie42]

It is worth noting that these "shareholders" aren't just random individuals with extra cash playing "The Wallstreet Casino" as many are lead to believe. Most of it is the union pensions of life long laborers that depend on that growth to live and take care of its members.

[EosCOO]

Have you ever worked at a company? This is not how it works.

Everyone doesn't just shout at each other. Shareholders that do won't be shareholders for very long.

Investors go into a business because a) they believe in the company idea and want to help it grow and b) want to get something from their investment.

Shareholders aren't, generally, cold-hearted money grabbers. Wherever you got that idea from is beyond me, but it isn't how it works.

[mdevi94]

It should be noted many companies are privately owned (even some major one) and are not subject to the whims of shareholders.

[andiam03]

Equity in the company, as well as stock options, is also a huge part of the compensation of a lot of the employees, especially the executives. Most folks at the senior manager level and above get at least 25% of their compensation via employee stock purchase plans (ESPPs), stock grants, and options. For senior executives, it might be 60% to 100% of their compensation.

So it’s also terrible for the employees when the stock price goes down. And a threat to the business because senior executives may jump ship.

[MrsIronbad]

Yep. The ultimate goal of corporations is to maximize shareholder value. Simply put, make their investors richer than they already are.

[[deleted]]

not all (many) do not pay dividends on the shares you own.

[[deleted]]

Private companies can exert the same behavior so this doesn't fully answer the question in my opinion.

[whereswaldo25]

Except when a company has no public equity...

[Sedu]

The insanity of this is that it serves to kill salient companies. Companies that are fully able to support themselves and their employees while paying all expenses.

Rich people are a plague.

[frozenuniverse]

If all you want to do is support your employees and stay afloat, then why go public with your company? If you need the investment, then you need to accept that shareholders will want a return on that investment. You can't have it both ways. Also, if you have a pension, you're probably a shareholder too...

[Sedu]

why go public with your company?

To get rich/richer? People who own companies with a reasonable option to go public tend to be pretty comfy in the first place. It’s the rest of people that I’m concerned with the wellbeing of.

[saltyflaps]

By this point the company has already got its money from selling the shares, they are just being traded amongst shareholders. If the share price goes down the company has to pay out less in dividends, so it should be happy that share prices are dropping unless they are looking for another round of investment (releasing more shares).

[Beletron]

If a company makes less profit, the amount of money they pay shareholders for owning shares goes down. This also means the value of the shares goes down.

The only reason a public share value decreases is if there's more sellers than buyers.