5 ms·

As if CEOs wouldn't be trying to max their stock value without the word of Milton Friedman

AnthonyMouse 4y ago
The real problem is that "shareholders" stopped being people and started being large funds. When the shareholders are people with a long-term stake in the company, like the founders, they can make long-term decisions or choose not to want the absolute most profit-maximizing thing because actually they're already pretty rich and maybe some things are more important. When they're fund managers, they want quarterly profits because that's how they get their bonus, and their fund may not even own shares in that company in a year's time.
- eru 4y ago
  Who says large funds don't have long-term stakes and can't help make long-term decisions? Fund managers want perhaps to see quarterly profits for their fund, but that's not the same thing as quarterly profits at the underlying companies. Your fund can also profit, if the stock prices of the underlying companies rise. To give some existence proofs, have a look at how Amazon, Microsoft, Google, Tesla etc had rising share prices long before they ever returned any money to shareholders. Or how shortly into the covid pandemic market prices for stocks recovered, even though the pandemic wasn't over at all: that was purely based on investors looking to the longer term future. > [...] and their fund may not even own shares in that company in a year's time. For that to happen, they need to sell the company to someone else, and that other person will pay more for a company with a bright future.
  - lordnacho 4y ago
    The funds managers all own the same companies and thus have little interest in having them compete with each other. This is why almost every sector of the economy is dominated by a few large firms.
  - AnthonyMouse 4y ago
    > To give some existence proofs, have a look at how Amazon, Microsoft, Google, Tesla etc had rising share prices long before they ever returned any money to shareholders. This was also true of Juicero and Pets.com. Moreover, the people investing in small startups are generally not huge funds. The funds buy in after the company is established. Tesla turned a profit before they were added to the S&P 500. > For that to happen, they need to sell the company to someone else, and that other person will pay more for a company with a bright future. Most of the scam comes from information asymmetries. The current owners hire managers who they know will boost short-term prospects in a conspicuous way by damaging long-term prospects in subtle and hidden ways, e.g. by removing slack that increases short-term efficiency but is an existential risk to the company if anything goes wrong. This makes the company look like it's in better shape than it is to less than fully informed investors (also known as investors) and allows you to sell the shares to them for more than the company would be worth if they fully understood the risks they were taking.
    - eru 4y ago
      > This was also true of Juicero and Pets.com. Yes, it's hard to predict the future. > Moreover, the people investing in small startups are generally not huge funds. The funds buy in after the company is established. Tesla turned a profit before they were added to the S&P 500. One reason those small startups can attract capital in the first place, is because their early investors can reasonably expect to cash out by selling to huge funds once the company gets established. Remove the late investors, and you dry up the payouts for early investors. > Most of the scam comes from information asymmetries. That's hardly news. Investors take that into account. What keeps investing from turning into a market for lemons is that companies can communicate to prospective investors and show them transparently that they eg didn't remove the slack. As an investor, you can go by the maxim of 'guilty, unless proven innocent'. So if a company does not have that transparency, you should value them as-if they have skeletons in the closet. (And if companies explicitly lie, that's already a crime.)
      - AnthonyMouse 4y ago
        > Yes, it's hard to predict the future. Which only makes the problem worse, because the early investors then have the incentive to create and prop up garbage companies as long as they think they can sell them to do the next guy before the crash. Which is more possible the less the funds need to pay attention to each stock, i.e. the more "diversified" each person's investments are. > One reason those small startups can attract capital in the first place, is because their early investors can reasonably expect to cash out by selling to huge funds once the company gets established. The funds are an abstraction over the underlying investors. Right now you have Joe Middle Class who has a retirement account which is invested in thousands of companies he has no incentive to pay any attention to because none of them individually affect his savings by a significant amount. If it was four or five companies, he would have the incentive to keep track of management decisions there. He may even be working for one of them, because he is then using an information asymmetry to his advantage when he knows from the inside how well that company is managed. But then we try to inhibit this kind of thing even though it would make markets more efficient. The bigger cause of the problem is that companies are huuuge, so that they can't be owned by any reasonable number of people. A trillion dollar company has to be owned by millions of separate individuals because even the 99th percentile individual doesn't have enough wealth to own a significant fraction of a company that size. But why do we need companies to be that big? Break them up. They could have the same total valuation as many separate companies, without each being so unmanageably large. Potentially even higher total valuations, because the need to do the following is less when each company is smaller and less complicated: > As an investor, you can go by the maxim of 'guilty, unless proven innocent'. So if a company does not have that transparency, you should value them as-if they have skeletons in the closet. And that's the point. The transparency isn't possible, not because the company doesn't publish the numbers, but because it's not worth deep diving into their conglomerated operations when they're only 0.2% of your portfolio. And when investors will be doing this regardless of whether the company is actually sacrificing long-term prospects for short-term numbers, the company has the incentive to do just that.

The real problem is that "shareholders" stopped being people and started being large funds. When the shareholders are people with a long-term stake in the company, like the founders, they can make long-term decisions or choose not to want the absolute most profit-maximizing thing because actually they're already pretty rich and maybe some things are more important. When they're fund managers, they want quarterly profits because that's how they get their bonus, and their fund may not even own shares in that company in a year's time.

eru 4y ago
Who says large funds don't have long-term stakes and can't help make long-term decisions? Fund managers want perhaps to see quarterly profits for their fund, but that's not the same thing as quarterly profits at the underlying companies. Your fund can also profit, if the stock prices of the underlying companies rise. To give some existence proofs, have a look at how Amazon, Microsoft, Google, Tesla etc had rising share prices long before they ever returned any money to shareholders. Or how shortly into the covid pandemic market prices for stocks recovered, even though the pandemic wasn't over at all: that was purely based on investors looking to the longer term future. > [...] and their fund may not even own shares in that company in a year's time. For that to happen, they need to sell the company to someone else, and that other person will pay more for a company with a bright future.
- lordnacho 4y ago
  The funds managers all own the same companies and thus have little interest in having them compete with each other. This is why almost every sector of the economy is dominated by a few large firms.
- AnthonyMouse 4y ago
  > To give some existence proofs, have a look at how Amazon, Microsoft, Google, Tesla etc had rising share prices long before they ever returned any money to shareholders. This was also true of Juicero and Pets.com. Moreover, the people investing in small startups are generally not huge funds. The funds buy in after the company is established. Tesla turned a profit before they were added to the S&P 500. > For that to happen, they need to sell the company to someone else, and that other person will pay more for a company with a bright future. Most of the scam comes from information asymmetries. The current owners hire managers who they know will boost short-term prospects in a conspicuous way by damaging long-term prospects in subtle and hidden ways, e.g. by removing slack that increases short-term efficiency but is an existential risk to the company if anything goes wrong. This makes the company look like it's in better shape than it is to less than fully informed investors (also known as investors) and allows you to sell the shares to them for more than the company would be worth if they fully understood the risks they were taking.
  - eru 4y ago
    > This was also true of Juicero and Pets.com. Yes, it's hard to predict the future. > Moreover, the people investing in small startups are generally not huge funds. The funds buy in after the company is established. Tesla turned a profit before they were added to the S&P 500. One reason those small startups can attract capital in the first place, is because their early investors can reasonably expect to cash out by selling to huge funds once the company gets established. Remove the late investors, and you dry up the payouts for early investors. > Most of the scam comes from information asymmetries. That's hardly news. Investors take that into account. What keeps investing from turning into a market for lemons is that companies can communicate to prospective investors and show them transparently that they eg didn't remove the slack. As an investor, you can go by the maxim of 'guilty, unless proven innocent'. So if a company does not have that transparency, you should value them as-if they have skeletons in the closet. (And if companies explicitly lie, that's already a crime.)
    - AnthonyMouse 4y ago
      > Yes, it's hard to predict the future. Which only makes the problem worse, because the early investors then have the incentive to create and prop up garbage companies as long as they think they can sell them to do the next guy before the crash. Which is more possible the less the funds need to pay attention to each stock, i.e. the more "diversified" each person's investments are. > One reason those small startups can attract capital in the first place, is because their early investors can reasonably expect to cash out by selling to huge funds once the company gets established. The funds are an abstraction over the underlying investors. Right now you have Joe Middle Class who has a retirement account which is invested in thousands of companies he has no incentive to pay any attention to because none of them individually affect his savings by a significant amount. If it was four or five companies, he would have the incentive to keep track of management decisions there. He may even be working for one of them, because he is then using an information asymmetry to his advantage when he knows from the inside how well that company is managed. But then we try to inhibit this kind of thing even though it would make markets more efficient. The bigger cause of the problem is that companies are huuuge, so that they can't be owned by any reasonable number of people. A trillion dollar company has to be owned by millions of separate individuals because even the 99th percentile individual doesn't have enough wealth to own a significant fraction of a company that size. But why do we need companies to be that big? Break them up. They could have the same total valuation as many separate companies, without each being so unmanageably large. Potentially even higher total valuations, because the need to do the following is less when each company is smaller and less complicated: > As an investor, you can go by the maxim of 'guilty, unless proven innocent'. So if a company does not have that transparency, you should value them as-if they have skeletons in the closet. And that's the point. The transparency isn't possible, not because the company doesn't publish the numbers, but because it's not worth deep diving into their conglomerated operations when they're only 0.2% of your portfolio. And when investors will be doing this regardless of whether the company is actually sacrificing long-term prospects for short-term numbers, the company has the incentive to do just that.