4 ms·

If companies voluntarily choose to operate with lower cash reserves and then end up unable to weather hard times or make necessary investments in their products

by mlyle 2y ago

If companies voluntarily choose to operate with lower cash reserves and then end up unable to weather hard times or make necessary investments in their products, do they have any fault for what happens next?

WalterBright 2y ago
You can't operate a successful company (i.e. with a decent ROI) if you're sitting on a Scrooge McDuck cash vault. It wasn't Boeing's fault that the governors shut down the economy, something that had never happened before in the US.
- mlyle 2y ago
  Boeings choice to not sufficiently invest in its core products while pumping its stock through buybacks belongs solely to Boeing and Boeing’s board. The impact to their reputation was a predictable and ignored consequence. In Boeing’s case it has very little to do with coronavirus, which was just a related example: some businesses set aside enough seed corn to survive without help, and others didn’t.
- lmm 2y ago
  > You can't operate a successful company (i.e. with a decent ROI) if you're sitting on a Scrooge McDuck cash vault. Of course you can. There are thousands of examples around the world - not least the great success story of the last decade or so, Apple. Minimising your cash holdings is a microoptimization. It might get you a fraction of a percent more return in good times, but that doesn't make it wise.
  - WalterBright 2y ago
    Apple is a highly unusual story. The purpose of being in business is to make more money than you could by putting the money in an interest-bearing account. Another way of saying it is there is no point to operating a business if you cannot make more than the "opportunity cost". > Minimising your cash holdings is a microoptimization. What businesses are in business to do is put cash to work earning more than the opportunity cost, often meaning about 15% ROI. That certainly is not a microoptimization. In fact, what most businesses do is borrow money at, say, 5%, and then invest the money so it earns, say, 20%, and therefore make 15% overall. I do something similar with my investments. I borrow money and buy investments with the borrowed money. It's similar to borrowing money to buy a house, and then selling the house at an appreciated price to make many multiples of your down payment.
    - mlyle 2y ago
      > I do something similar with my investments. I borrow money and buy investments with the borrowed money. Yes, minimizing uninvested capital --- or the extreme case of it, turning that negative through leverage --- is great, until it isn't.
      - WalterBright 2y ago
        You're never going to make much money if you aren't willing to take on risk. Elon Musk at one point was within hours of personal bankruptcy with Tesla when he managed to secure more funding. He's the richest man in the world, and got that way by taking on enormous personal risk. How wealthy would you be today if you put everything you had into Amazon stock the day of its IPO?
        mlyle 2y ago
        Yes, but the world doesn't work better if everyone maximally leverages their way into every weakly EV-positive (or EV-negative) high volatility play. If everyone is maximally leveraged, any tiny negative disturbance wipes out all wealth. At some point, you're just hoping to get lucky, and to leave other people (debtors, governments) holding the bill if you don't. This is what people talk about when they criticize others for "privatizing profits, socializing risk." Economists have a word for it, too: "moral hazard." https://en.wikipedia.org/wiki/Moral_hazard https://en.wikipedia.org/wiki/Moral_hazard Back to Boeing: Boeing put up really good numbers by gutting engineering and manufacturing organizations, hoping it would all turn out okay. For awhile it did, but then it didn't. And it's questionable how much of these costs Boeing is going to bear, because there's a whole lot of talk in policymaking circles about how to keep an important defense manufacturer and top manufacturer alive (through contracts, tariffs, and supportive policy).
        WalterBright 2y ago
        Creditors know they are taking a risk when they loan out money, and that risk is priced into the interest rate. The moral hazard comes into play when the risk is forced on some unwitting bystander.

by mlyle 2y ago

WalterBright 2y ago

You can't operate a successful company (i.e. with a decent ROI) if you're sitting on a Scrooge McDuck cash vault. It wasn't Boeing's fault that the governors shut down the economy, something that had never happened before in the US.

mlyle 2y ago
Boeings choice to not sufficiently invest in its core products while pumping its stock through buybacks belongs solely to Boeing and Boeing’s board. The impact to their reputation was a predictable and ignored consequence. In Boeing’s case it has very little to do with coronavirus, which was just a related example: some businesses set aside enough seed corn to survive without help, and others didn’t.
lmm 2y ago
> You can't operate a successful company (i.e. with a decent ROI) if you're sitting on a Scrooge McDuck cash vault. Of course you can. There are thousands of examples around the world - not least the great success story of the last decade or so, Apple. Minimising your cash holdings is a microoptimization. It might get you a fraction of a percent more return in good times, but that doesn't make it wise.
- WalterBright 2y ago
  Apple is a highly unusual story. The purpose of being in business is to make more money than you could by putting the money in an interest-bearing account. Another way of saying it is there is no point to operating a business if you cannot make more than the "opportunity cost". > Minimising your cash holdings is a microoptimization. What businesses are in business to do is put cash to work earning more than the opportunity cost, often meaning about 15% ROI. That certainly is not a microoptimization. In fact, what most businesses do is borrow money at, say, 5%, and then invest the money so it earns, say, 20%, and therefore make 15% overall. I do something similar with my investments. I borrow money and buy investments with the borrowed money. It's similar to borrowing money to buy a house, and then selling the house at an appreciated price to make many multiples of your down payment.
  - mlyle 2y ago
    > I do something similar with my investments. I borrow money and buy investments with the borrowed money. Yes, minimizing uninvested capital --- or the extreme case of it, turning that negative through leverage --- is great, until it isn't.
    - WalterBright 2y ago
      You're never going to make much money if you aren't willing to take on risk. Elon Musk at one point was within hours of personal bankruptcy with Tesla when he managed to secure more funding. He's the richest man in the world, and got that way by taking on enormous personal risk. How wealthy would you be today if you put everything you had into Amazon stock the day of its IPO?
      - mlyle 2y ago
        Yes, but the world doesn't work better if everyone maximally leverages their way into every weakly EV-positive (or EV-negative) high volatility play. If everyone is maximally leveraged, any tiny negative disturbance wipes out all wealth. At some point, you're just hoping to get lucky, and to leave other people (debtors, governments) holding the bill if you don't. This is what people talk about when they criticize others for "privatizing profits, socializing risk." Economists have a word for it, too: "moral hazard." https://en.wikipedia.org/wiki/Moral_hazard https://en.wikipedia.org/wiki/Moral_hazard Back to Boeing: Boeing put up really good numbers by gutting engineering and manufacturing organizations, hoping it would all turn out okay. For awhile it did, but then it didn't. And it's questionable how much of these costs Boeing is going to bear, because there's a whole lot of talk in policymaking circles about how to keep an important defense manufacturer and top manufacturer alive (through contracts, tariffs, and supportive policy).
        WalterBright 2y ago
        Creditors know they are taking a risk when they loan out money, and that risk is priced into the interest rate. The moral hazard comes into play when the risk is forced on some unwitting bystander.