4 ms·

The S&P 500 is rebalanced periodically, meaning companies are removed and added. That makes it not a good assessment of the hypothesis, one needs to find somet

The S&P 500 is rebalanced periodically, meaning companies are removed and added. That makes it not a good assessment of the hypothesis, one needs to find something that is pinned to the S&P 500 one year, then tracks the same 500 companies over a given period of time, including those that drop out and excluding those that grow to be included in the time period of interest.

WalterBright 9y ago
If the theory was correct, you'd see companies join the stock market with high valuations, and then trend downwards to oblivion as those long term chickens come to roost. But this is just not happening. Look how richly rewarded AMZN is for long term choices.
- dredmorbius 9y ago
  Long term return on invested capital has been declining since the 1960s. Periodic exceptions appear, almost always in winner-take-all network spaces over this period (energy companies being a possiblee exception), frequently showing a rapid rise and more precipitous fall. AT&T, IBM, Microsoft, Google, Amazon, among them. https://www.forbes.com/sites/stevedenning/2012/01/25/shift-index-2011-the-most-important-business-study-ever/#5b98e213a6e1 https://www.forbes.com/sites/stevedenning/2012/01/25/shift-i...
  - WalterBright 9y ago
    > Long term return on invested capitalhas been declining since the 1960s. Need to take into account the ever-greater share of the GNP consumed by the government. MSFT has been around for >30 years. Still waiting for their sacrifice of the long term to produce a precipitous fall.
    - ScottBurson 9y ago
      It arguably produced stagnation during the Ballmer era.
    - dredmorbius 9y ago
      http://2.bp.blogspot.com/-pSBLtgulQvo/To6RGPsHfAI/AAAAAAAAY1A/oqAreKP5gg4/s1600/chart-of-the-day-apple-vs-microsoft-market-capitalization-october-2011.jpg http://2.bp.blogspot.com/-pSBLtgulQvo/To6RGPsHfAI/AAAAAAAAY1... Microsoft eventually climbed above its Dec 9, 1999 close. In late 2016.
      - WalterBright 9y ago
        Only if you want to argue that the 2000 stock market crash was due to Microsoft's short term thinking. (and Microsoft's profits continued to rise during the 2000's, their P/E dropped, not their profits)
        dredmorbius 9y ago
        Microsoft's relative standing within the tech world also fell, though slightly later,, 2005-ish. PG's essay, as with most realisations, postdates reality, and specifically suggests by 2005. http://www.paulgraham.com/microsoft.html http://www.paulgraham.com/microsoft.html
        WalterBright 9y ago
        Can you show that was the result of sacrificing the long term for the next quarter's profits? I'm not hypothesizing that corporations don't make strategic errors, of course they do. I'm saying they are not rewarded for sacrificing the long term to pump up quarterly results - and I've seen no evidence of Microsoft doing that.
        dredmorbius 9y ago
        You'd refuted the caim of long-term decline with a single counterexample. I responded noting that an earlier period's darling had in fact declined. I really don't have the time or patience to go into details here, though I can point to Microsoft's monopolistic and anticompetitive business practices, its quality problems with bugs, security, malware, and spyware, its "plays poorly with others" reputation (see PG's essay for a manifestation), and considerable brand erosion, to the point that Microsoft branding, particularly within the mobile space (WinCE, Windows Mobile, Zune), and search (Bing). Much of which might be traced to pursuit of short-term returns over long-term risk. Or in a word: yes.
- ScottBurson 9y ago
  > Look how richly rewarded AMZN is for long term choices. Yes, Bezos made it clear that he was going to reinvest all profits for a long time. Although obviously some people thought this was a great strategy, it was considered quite unusual. Google is another example of a company that has done very well while making it clear they were not going to dance to Wall Street's tune. But the existence of notable exceptions doesn't disprove the overall trend. An awful lot of companies these days don't seem to be able to find any better use for their retained earnings than stock buybacks ... at a time when technological change is only continuing to accelerate. Even if overall R&D spending is up, as might not be too surprising in an era of record profits, it could be up a lot more.
  - WalterBright 9y ago
    The overall trend is companies that invest for the long term are richly rewarded, and the S&P 500 shows an upward trend. I do know a couple companies that "danced to Wall Street's tune", or what they imagined it was, and screwed the long term position for quarterly profits. WS investors were not fooled, and their stocks tanked. Do you really think that sophisticated investors who study the companies they invest in are so stupid as to reward companies for doing this?
- stevenwoo 9y ago
  I think part of this is that the S&P 500 is the largest 500 by capital. It's not a perfect analogy but it is sort of like how wealthy people can live off interest/dividends of their investments where no one else can afford to live like that. So there is a Worldcom or Enron or Toys R US or Sears or Montgomery Wards every once in a while to totally collapse but something like Kodak can go through a long period on top until it declines when its moat declines or even two of the three car manufacturers in the USA and most of the major financial institutions would have gone bankrupt without government intervention in the last 20 years.

WalterBright 9y ago

If the theory was correct, you'd see companies join the stock market with high valuations, and then trend downwards to oblivion as those long term chickens come to roost. But this is just not happening. Look how richly rewarded AMZN is for long term choices.

dredmorbius 9y ago
Long term return on invested capital has been declining since the 1960s. Periodic exceptions appear, almost always in winner-take-all network spaces over this period (energy companies being a possiblee exception), frequently showing a rapid rise and more precipitous fall. AT&T, IBM, Microsoft, Google, Amazon, among them. https://www.forbes.com/sites/stevedenning/2012/01/25/shift-index-2011-the-most-important-business-study-ever/#5b98e213a6e1 https://www.forbes.com/sites/stevedenning/2012/01/25/shift-i...
- WalterBright 9y ago
  > Long term return on invested capitalhas been declining since the 1960s. Need to take into account the ever-greater share of the GNP consumed by the government. MSFT has been around for >30 years. Still waiting for their sacrifice of the long term to produce a precipitous fall.
  - ScottBurson 9y ago
    It arguably produced stagnation during the Ballmer era.
  - dredmorbius 9y ago
    http://2.bp.blogspot.com/-pSBLtgulQvo/To6RGPsHfAI/AAAAAAAAY1A/oqAreKP5gg4/s1600/chart-of-the-day-apple-vs-microsoft-market-capitalization-october-2011.jpg http://2.bp.blogspot.com/-pSBLtgulQvo/To6RGPsHfAI/AAAAAAAAY1... Microsoft eventually climbed above its Dec 9, 1999 close. In late 2016.
    - WalterBright 9y ago
      Only if you want to argue that the 2000 stock market crash was due to Microsoft's short term thinking. (and Microsoft's profits continued to rise during the 2000's, their P/E dropped, not their profits)
      - dredmorbius 9y ago
        Microsoft's relative standing within the tech world also fell, though slightly later,, 2005-ish. PG's essay, as with most realisations, postdates reality, and specifically suggests by 2005. http://www.paulgraham.com/microsoft.html http://www.paulgraham.com/microsoft.html
        WalterBright 9y ago
        Can you show that was the result of sacrificing the long term for the next quarter's profits? I'm not hypothesizing that corporations don't make strategic errors, of course they do. I'm saying they are not rewarded for sacrificing the long term to pump up quarterly results - and I've seen no evidence of Microsoft doing that.
        dredmorbius 9y ago
        You'd refuted the caim of long-term decline with a single counterexample. I responded noting that an earlier period's darling had in fact declined. I really don't have the time or patience to go into details here, though I can point to Microsoft's monopolistic and anticompetitive business practices, its quality problems with bugs, security, malware, and spyware, its "plays poorly with others" reputation (see PG's essay for a manifestation), and considerable brand erosion, to the point that Microsoft branding, particularly within the mobile space (WinCE, Windows Mobile, Zune), and search (Bing). Much of which might be traced to pursuit of short-term returns over long-term risk. Or in a word: yes.
ScottBurson 9y ago
> Look how richly rewarded AMZN is for long term choices. Yes, Bezos made it clear that he was going to reinvest all profits for a long time. Although obviously some people thought this was a great strategy, it was considered quite unusual. Google is another example of a company that has done very well while making it clear they were not going to dance to Wall Street's tune. But the existence of notable exceptions doesn't disprove the overall trend. An awful lot of companies these days don't seem to be able to find any better use for their retained earnings than stock buybacks ... at a time when technological change is only continuing to accelerate. Even if overall R&D spending is up, as might not be too surprising in an era of record profits, it could be up a lot more.
- WalterBright 9y ago
  The overall trend is companies that invest for the long term are richly rewarded, and the S&P 500 shows an upward trend. I do know a couple companies that "danced to Wall Street's tune", or what they imagined it was, and screwed the long term position for quarterly profits. WS investors were not fooled, and their stocks tanked. Do you really think that sophisticated investors who study the companies they invest in are so stupid as to reward companies for doing this?
stevenwoo 9y ago
I think part of this is that the S&P 500 is the largest 500 by capital. It's not a perfect analogy but it is sort of like how wealthy people can live off interest/dividends of their investments where no one else can afford to live like that. So there is a Worldcom or Enron or Toys R US or Sears or Montgomery Wards every once in a while to totally collapse but something like Kodak can go through a long period on top until it declines when its moat declines or even two of the three car manufacturers in the USA and most of the major financial institutions would have gone bankrupt without government intervention in the last 20 years.