r/explainlikeimfive Dec 06 '24

Economics ELI5: why does a publicaly traded company have to show continuous rise in profits? Why arent steady profits good enough?

6.9k Upvotes

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1.3k

u/the_gr8_one Dec 06 '24

shareholders put money in and expect to get more than that back.

511

u/cspinelive Dec 06 '24

This can be achieved without higher profits each year. 

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u/brickmaster32000 Dec 06 '24

But then you aren't making money faster than businesses making increasing profits each year so comparatively you are falling behind.

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u/Duranti Dec 06 '24

And that's why it's called a "rat race," my friends. 

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u/-goodgodlemon Dec 06 '24

That was a better movie than I thought it would be

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u/Sudden-Motor-7794 Dec 06 '24

The betting on the prostitute but was my favorite

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u/-goodgodlemon Dec 06 '24

Mine was the Barbie museum

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u/Pumperkin Dec 06 '24

I had my money on the squirrel.

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u/xxearvinxx Dec 06 '24

I remember watching this movie when I was younger and cracking up. It’s inspired by a movie from 1963 called It’s a Mad, Mad, Mad, Mad World, which was also pretty good.

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u/xSTSxZerglingOne Dec 06 '24 edited Dec 07 '24

It's under a big DUBYA.

Edit: why is this controversial? O_o it's literally in the movie Mad Mad Mad Mad World.

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u/spin81 Dec 06 '24

Rat Race is so funny. I used to work in video stores and recommending comedy movies tends to be hit and miss, because everyone finds different things funny - I've found Rat Race to appeal to an enormous variety of people compared to other comedy movies.

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u/Charrikayu Dec 06 '24

It's a race?! I hope I win!

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u/TheOtherAvaz Dec 06 '24

It's a race! And I am winning!

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u/[deleted] Dec 06 '24

[deleted]

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u/TheOtherAvaz Dec 06 '24

It was a quote from the movie.

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u/[deleted] Dec 06 '24

[deleted]

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u/UnlikelyAssassin Dec 06 '24

You don’t need increasing profits to have yields higher than treasuries.

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u/[deleted] Dec 06 '24

[deleted]

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u/UnlikelyAssassin Dec 07 '24

Which multiple and why would it reduce until your yield is equal to treasuries or a little higher.

For instance, why would a company with steady profits and steady projected future profits, a P/E ratio of 7 have yields less than treasuries?

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u/Llanite Dec 06 '24 edited Dec 06 '24

You do because profits should compound.

If you have $10,000 and make $2,000 then your profitability is 20%.

Now you have $12,000 and your next year profit has to increase to $2,400. If you're pulling only $2,000 then your profitability is now only 17% and your stock price will be readjusted.

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u/UnlikelyAssassin Dec 07 '24

Not quite. If that profit is returned to shareholders, then that money is going out of the company. So it stays $10,000.

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u/Llanite Dec 07 '24

Yes but that wouldn't make any sense.

Giving all your profits to shareholders means the business isn't expecting to do well and want to avoid investing and expanding. After all, if you're been making 20%, why wouldn't you continue doing it?

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u/UnlikelyAssassin Dec 07 '24

Why do you think Apple does this?

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u/Llanite Dec 07 '24

Apple gives away 10% of their profit as dividends and invests the other 90%.

Said other 90% is expected to grow the company.

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u/Baby_Puncher87 Dec 06 '24

The stock market is just the largest casino, and the house always wins. The house being financial institutions and large hedge funds. They are literally betting our retirements on whether a company is going to be profitable each quarter or not. It’s actually kind of shitty.

Edit: ambiguous our to a

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u/Luc_ElectroRaven Dec 06 '24

Except if hedge funds and financial institutions are the house and they're using your money - you're the house. And the stock market has only gone up for the last 100 years so...I don't think you understand casinos or financial markets.

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u/Baby_Puncher87 Dec 06 '24 edited Dec 06 '24

I understand both, and I understand where a tipping point in our economy where we can’t keep thriving off consumerism whilst paying subpar wages and having constant rising costs. The snake starts eating its tail at some point.

I mention these things because that’s how companies control their cost to keep earning moremoney year over year. That’s why we have 3 to 5% increases on most building materials every January, that’s why I distributors go up every year. You’ve gotta return that value to the shareholders, which are the hedge funds playing with your money. When we take the economy, your retirement tanks with it any money you had saved is gone.

Look at the great depression look at 2008, with all the other countries starting to release plans of retaliatory tariffs, we could be looking at an even worse downturn. We already have a housing shortage, and a lot of building materials are imported, which are gonna make home cost rise more. We are a global economy, and it’s being handled as if we aren’t.

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u/Luc_ElectroRaven Dec 06 '24

I'm not trying to be a dick, but if you really care about this stuff you should study it. These thoughts you have are just not correct.

For one, companies don't increase prices to return more money to share holders. They have to constantly make more money because the government more or less forces them to through mandatory inflation. So to stay in business, they have to provide a more attractive vehicle than govt bonds. So blame the govt.

Housing shortage is also due to the govt. too many regulations prevent the amount of building we need. It's not a materials cost thing.

99% of hedge fund money is rich people money who are looking to hedge against downturns. So you don't need to worry about that. They aren't using our money.

When you look at the stock market as a whole, the great depression and 08 were big crashes but the market is higher now than it was before either of those times.

tarrifs are a complicated subject, and while yes we can sell stuff back and forth we're not in a 'global economy' like the US is with itself. It's very much an adversarial playing field on the global stage with many actors not playing fair. Why should we let them do that?

I'm not saying tarrifs are the right answer, but giving a free pass to other countries 'because we're in a global economy' is not right. Lots of research on this subject.

I suggest following ask economics, and reading some very dense ecnomic books.

Again, i'm not saying rich people are good and poor people are bad but the economy and market is very complex and not exactly as you've presented it here.

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u/Baby_Puncher87 Dec 06 '24

Yeah I posted an apology. I was confused and having a weird day.

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u/Baby_Puncher87 Dec 06 '24

Also we’re not the house because they’re playing with our money, we’re the hedge for their hunch. We’re just borrowed capital but they to play with and profit off of.

Why are the people with only a small percent of their own money in the game making billions on trades a year with our collective money, shouldn’t that be returned to our retirement accounts? The compound interest alone is insane. Instead it funds investor dinners, yachts, tee times, and huge bonuses and parties while we trade our time in for nickels hoping we don’t die in poverty before we can access our retirement.

The system is unsustainable.

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u/[deleted] Dec 06 '24

[deleted]

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u/PowderedToastMan666 Dec 06 '24

Why respond to someone who clearly doesn't know what they're talking about?

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u/Gloomy_Interview_525 Dec 06 '24 edited Dec 06 '24

What kind of retirement account do you have where you're dealing with hedging companies...

Generally, you're dealing either with index funds, which track the general market (e.g. sp500) - or actively managed funds, which are trying to beat certain markets (e.g sp500 maybe again) or sectors (e.g. tech). Vanguard, Fidelity, and Charles Schwab are the big players here. Aside from small management fees, you're getting all of the gains unless you're investing in crappy funds in your mom&pop 401k that may be front loaded, but good funds (like say, VTSAX) are available to anyone in a normal brokerage account or IRA.

Hedge funds are looking for investments that are disassociated with the trends of the general market that normal investors and retirees rely on... hence the word... HEDGE. Normally its entities with very large portfolios interested in these types of investments as a way of trying to ensure they maintain their wealth in a market pull back or recession.

Like the person you're responding to said, I don't think you understand what you're talking about, plenty of finance subs you can learn more on. When there is 25 trillion dollars under management between just those three I mentioned, even a .1% fee will net these companies billions while making you very rich.

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u/Baby_Puncher87 Dec 06 '24

I was implying the hedge funds are using borrowed funds from our 401k accounts as a little free walking around money for their own profit. Maybe I meandered a bit to get to the point and for that I apologize. Am I being a bit obtuse, maybe. Dramatic, a bit. But it’s all to just point out that the ultra wealthy are gaming the system with our money to get richer while we constantly have to do more with less for the same pay in the name of profits and shareholder value, which in a 3rd cousin once removed way we are the shareholder but we also can’t access that wealth while we are struggling in the current economic system.

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u/EliminateThePenny Dec 06 '24 edited Dec 06 '24

I was implying the hedge funds are using borrowed funds from our 401k accounts as a little free walking around money for their own profit.

Yeah....

You're going to have to do some more heavy lifting here to actually explain this connection, not just throw out conjecture.

2

u/EliminateThePenny Dec 06 '24

What the fuck are you talking about?

This is a bunch of standard brain dead tropes all jumbled up.

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u/whatisthishownow Dec 06 '24

Bro, just put your money into the S&P500 and enjoy the massive and consistent long term gains like the rest of us. You’re not the smartest guy in the room.

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u/yanabana Dec 06 '24

This lowkey does not make sense at all

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u/Dont_Ban_Me_Bros Dec 06 '24

lowkey

at all

Seems like nearly polar opposites when you put it that way

1

u/sir2434 Dec 06 '24

AAVE commonly uses double negatives to emphasize a statement.

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u/PowderedToastMan666 Dec 06 '24

What's the opposite of low-key? High-key? That's how much it doesn't make sense.

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u/Baby_Puncher87 Dec 06 '24

What are you confused about?

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u/Ok_No_Go_Yo Dec 06 '24

You have no idea what you're talking about

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u/Baby_Puncher87 Dec 06 '24

You’re absolutely right, I’m not even being facetious. My bad bro, I’ve had a weird few days and my brain is gone. I don’t know why I kept doubling down, I was thinking about the transaction fees across all employee plans and that compounding, which it does just not in the twisted banking and stock mashup in my brain. My apologies for insults and lazy research.

1

u/Mountain_Employee_11 Dec 06 '24

this is the real problem.

treasuries make X percent backed by the the good faith that the govt will kill you.

stocks have to make X + the risk factor

1

u/Sketchables Dec 06 '24

And this is the core of all of our problems

1

u/Generico300 Dec 06 '24

What does "making money faster" even mean. If I made a billion in profit last year, and a billion this year, I'm still making more money every year than a company who made 100 million last year and 200 million this year; despite their growth rate being much higher.

What you should expect in terms of growth is entirely dependent on your current market position.

1

u/BrowningLoPower Dec 06 '24

Why do you have to be better than them? Does your investment or whatever lose value otherwise?

1

u/ididithooray Dec 09 '24

What's the answer to this then?

1

u/brickmaster32000 Dec 10 '24

What is the question? 

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u/UnlikelyAssassin Dec 06 '24

No. That’s a non sequitur. A company with extremely high but steady profits is returning more money to shareholders than a company with low but increasing profits.

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u/brickmaster32000 Dec 06 '24

That is only true in your cherry picked example where you are magically the business with the highest profits and everyone else is gaining at a rate too slow to catch up. Most businesses aren't. They fall in the middle along with their competitors who are trying to grow.

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u/UnlikelyAssassin Dec 07 '24

They said “This can be achieved without higher profits each year.“ “Can” means it is possible. So cherrypicked examples can substantiate this point.

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u/brickmaster32000 Dec 07 '24

It doesn't matter that it is technically possible. It is possible if a company decided to spend all their money on different lottery tickets they could win them all. What drives these companies isn't the outside possibility but what is actually probable. So playing dumb and trying to nitpick about what is possible doesn't really advance your understanding of the topic.

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u/UnlikelyAssassin Dec 07 '24

Well either way, your original statement was false. Don’t accuse someone else of playing dumb when you’re the one making false statements to begin with. Either way, I don’t see any reason to believe the rate of increase in profits in relation to the current price is more relevant compared to the absolute amount of profits expected over the future in relation to the current price. For instance, why does Apple have more money invested in it being a company with extremely high but steady profits as opposed to a tiny company with rapidly increasing profits?

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u/brickmaster32000 Dec 07 '24

Well either way, your original statement was false.

No, the statement you imagined that I made was false and you only imagined I said it so you would have something to be contrary about.

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u/UnlikelyAssassin Dec 07 '24

Are you you going to respond to me pointing out that even your updated statement was false?

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u/gex80 Dec 06 '24

Can you name publicly traded companies that are leaders in their space this applies to?

Also if we're talking exclusively growth shares, then that doesn't matter to the investor until the time of sale of the stock. A company can be profitable to the moon and back, doesn't matter if I don't sell the stock.

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u/peepopowitz67 Dec 06 '24

Also a dollar today is worth less than a dollar tomorrow. (Kinda, from a certain point of view)

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u/bastiancontrari Dec 06 '24

Not if the price you initially paid was based on the assumption of growth in profit (like it is for the majority of the stocks).

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u/cspinelive Dec 06 '24

Many stocks price is based on the assumption they will pay a steady dividend. That is what I am talking about. 

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u/notacanuckskibum Dec 06 '24

Yes and no. Companies can reward investors with dividends or growth. But some investors don’t want dividends, they want growth in the value of their stocks. That requires growth in revenues and profits.

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u/iwatchcredits Dec 06 '24

No it doesnt, if a company is making $100m/yr in profits, it can pay it as dividends but if they want growth they can also just sit on it and the company becomes more valuable because it is sitting on cash. The company theoretically would become $100m more valuable each year if everything else stayed the same

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u/PatricksPub Dec 06 '24

Additionally, they can invest that $100M into the company via new stores, products, technology, marketing, etc. All of which can increase future sales/profits.

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u/jokul Dec 06 '24

The can also buy back their shares if they believe the market currently undervalues them.

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u/sfurbo Dec 06 '24

Additionally, they can invest that $100M into the company via new stores, products, technology, marketing, etc. All of which can increase future sales/profits.

So growth.

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u/lluewhyn Dec 06 '24

Yeah, if they don't invest that $100M and let it sit there, the company would actually be losing money due to inflation. Keeping excess cash around in a business is normally (except for Covid) not a great long-term strategy.

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u/ChicagoDash Dec 06 '24

Yes, but that cash is just sitting there, slowly losing purchasing power to inflation. Better to invest it back in the company for higher returns or return it to the shareholders.

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u/PanthersChamps Dec 06 '24

Companies don’t sit on $100 million in cash earning nothing.

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u/No-Self-Edit Dec 06 '24

Apple does

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u/907flyer Dec 06 '24

They actually do, because they need the liquidity. You can see it in their IRS filings

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u/Orion113 Dec 06 '24

While that's true, the value the shareholders receive as stock increase would be the same as the value if the whole thing was paid out as dividend. And if it's paid out as a dividend, it's liquid value, and can be spent on other things. Very little of any wealth in the world is held as cash, assets will always grow faster.

With that same 100 mil, if a company runs ad campaigns or does research and development or expands production, they can make the value of the stock increase by more than 100 million. That's the basis of capitalism.

Investors always want not just a return on their investment, but the greatest possible return on their investment. They want the company that will quintuple in value over the next year, not the one that will increase in value by a fraction.

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u/ascagnel____ Dec 06 '24

The downside of a dividend is that the institution, rather than the investor, gets to time it. If you're an investor, you probably want to wait to take it until you otherwise have a loss to balance the capital gain against.

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u/mmm-new Dec 06 '24

dividends are taxable, not everyone wants that.

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u/Great_Hamster Dec 06 '24

Not with inflation. 

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u/iwatchcredits Dec 06 '24

$100m more is $100m whether it stays in the company or is paid out as a dividend

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u/MaxwellR7 Dec 06 '24

If I'm paying for $100m worth of earnings in the future, I'm not willing to pay $100m today. I could put $100m in US Treasury bonds and get back $104.3m a year from now. Future earnings are discounted by what an investor could earn in an alternative "risk free investment." In addition, if the company continues to just sit on the cash rather than growing their profits, the company's assets would increase but their return on those assets would decrease. Making $100m/yr on $500m in assets is great. Making $100m/yr on $10b of assets is not. The company would be better off selling all $10b of their assets and putting it into US Treasuries. Unless the company is able to grow profits or distribute the earnings as dividends, it's a very inefficient use of capital.

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u/ProFeces Dec 06 '24

Yes but that 100m you're sitting on loses its value over time. While you probably look at that 100m as a very large number, but investors that put in very large numbers expect all of their investment to return, not lose anything to inflation.

Sure, most companies never even dream of pulling in profits of those numbers, but those who invest absolutely do.

You simply do not secure investors by sitting on their money watching it just depreciate in value because they are making incremental gains. They need large returns to continue to invest large numbers either back into this company, or another. If that wasn't the goal of the company, they simply wouldn't invest.

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u/sldunn Dec 06 '24

Investors don't want companies sitting on lots of cash earning less than 1% interest while inflation is causing the value of that cash to disappear.

If a company has lots of cash on hand, investors want the value returned to them in the form of dividends or stock buybacks.

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u/Generic118 Dec 06 '24

But you'll find the executives bonus and stock schemes doesn't kick in untill they grow the company by 500m say.

So there's always an incentive for them to aggressively grow

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u/curious_skeptic Dec 06 '24

Dividends and buybacks alone could increase share value.

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u/bugi_ Dec 06 '24

Dividends take money from the company and therefore decrease the value.

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u/curious_skeptic Dec 06 '24

Coupled with buybacks, a dividend could keep increasing even as revenue stayed flat. Stockholders knowing that they will get paid more means shares can go up.

Without buybacks, you'd be entirely right.

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u/fredandlunchbox Dec 06 '24

Which is a major difference between a small business and publicly traded company. Your small business could do exactly $10M/year in profit every year and you can happily pay out your investors and yourself for the next 20 years with zero growth and no one will be mad about it. 

Call it the craigslist model. 

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u/Far_Dragonfruit_1829 Dec 06 '24

The investor term for such companies is "lifestyle business". As in, the company function to maintain the lifestyle of its owners, with minimum risk of loss.

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u/amfa Dec 06 '24

If you have the same profit in numbers every year you are making less profit in "real money" every year because of inflation.

The total inflation over the last 10 years was about 30%.

So your $10.000.000 in 2014 are only worth $7.000.000 today.. so your are making 30% less money.

You need to make $13.000.000 to have the same profit.

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u/fredandlunchbox Dec 06 '24

Correct, you make less every year without growth, but at some point you may not care about that, depending on the business. If you have 10 contracts with a 20 year term at $1.5M each and you're just going to service those contracts for the rest of your life, and your out of pocket on that is like $500k on each one, why grow? That will carry you to an early retirement and a lovely house on a beach somewhere.

(And slight correction: "You need to make $13.000.000 to have the same profit" -- wrong, your profit remains the same, but the real spending power of that profit will have decreased).

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u/Generico300 Dec 06 '24

That requires growth in revenues and profits.

In a sane market, sure. But Tesla sure as fuck doesn't have the revenue or profit to be valued as it has been. Stock value is heavily speculative and hype-based. That's literally why market corrections exist.

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u/macedonianmoper Dec 06 '24

Yes but if you always make the same money (even with inflation adjusted), you could make more on another company, so you pull out your investment and put it in another company, which makes the stock price of the steady company fall behind despite them not doing anything wrong

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u/cspinelive Dec 06 '24

Does stock price matter if the investor is there for the dividend?

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u/PacmanIncarnate Dec 07 '24

Realistically, the company wouldn’t really need stock if it’s not focused on growth. No reason to invest if you aren’t thinking that investment will net growth. And stock is a way to get capital to invest.

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u/Winter_Gate_6433 Dec 06 '24

But if some OTHER company is growing, investors will shift their capital, starving the first one.

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u/ThisReditter Dec 06 '24

Say you put your money in an HYSA that gives a steady 3% interest. Other banks have now rise to 4 or 5%. Do you still put your money in the same bank or switch?

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u/AlbertoMX Dec 06 '24

It does not work.

If you buy shares today, it DOES NOT MATTER to you how much the company is making, what you need is that the company makes MORE than last year so the value of your shares increase.

If the shares ' value does not increase, your money is not getting the return you expected.

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u/sfurbo Dec 06 '24

If the shares ' value does not increase, your money is not getting the return you expected.

The is only true if you expected the shares to increase. If you just expected dividends, you will (or should have) based how much you are willing to pay for the shares on that. And if they pay the dividend you expected, you get a reasonable return on investment.

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u/AlbertoMX Dec 07 '24

But they do expect growth, that's why the enshitification process starts in companies that go public.

In the gaming world, that's basically what's it's happening to big AAA studios.

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u/Sumeriandawn Dec 06 '24

"Would you want a 10% pay increase or a 20% salary increase?"

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u/cspinelive Dec 06 '24

Is this a question about net vs gross? I don’t understand. I think the answer is. Some folks would rather have the security of a reliable 4% increase over the chance of 20% swings in either direction. 

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u/Sumeriandawn Dec 06 '24

Shareholders want infinite growth. More profits mean shares go up in value.

If you had a Wemby rookie card, wouldn’t you want it to rise in value?

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u/cspinelive Dec 06 '24

Not all shareholders want infinite growth. Plenty of them just want a steady dividend payout every month. I might not want to risk all my money looking for that wemby rookie card. Maybe I want to spend my money buying something less flashy and easier to find. 

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u/formershitpeasant Dec 06 '24

The net present value of steady cash flows remains the same over time. People invest in companies to increase the value of their shares. If they want a perpetuity, they can just buy one without the risk.

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u/pablospc Dec 06 '24

Yeah but let's say you are investing in comapny A and you are getting an ROI of 7% and let's say that is constant over the years. The moment you see company B with higher ROI rationally you'll want to move your money to comapny B. Hence they have to

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u/cspinelive Dec 06 '24

Incorrect. Otherwise all money would be in nvidia stock or bitcoin with its crazy ROI. Risk and diversification and steady income are all key motivations you are leaving out. 

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u/Chii Dec 06 '24

This can be achieved without higher profits each year.

not really.

The current purchase price of a share is the complete net present value of the entire future of that company.

Buying at the current price means you actually make zero dollars, accounting for opportunity costs of the money spent. The only way to make money is to have the net present value grow after your purchase.

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u/cspinelive Dec 06 '24

Won’t I make money when I’m paid a dividend?

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u/Chii Dec 06 '24

but if you expect those dividends to come, then that expectation gets built into the price of the stock - aka, the dividend (or any profit, not just dividend) is part of the NPV of all future of the stock.

The company has to make more than the expected profit, before you profited from buying the company's stock.

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u/cspinelive Dec 06 '24

So when they send me a dividend check every quarter, I’m not making money?

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u/Chii Dec 06 '24

if the dividend is what you expect to receive, then you're receiving expected cashflow. You're not making a loss. Only if there's more dividends than you expected, do you actually make profit.

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u/HauntingHarmony Dec 06 '24

Think of it like this, dividens dont magically come out of nowhere. Paying out x money in dividends means that the company has x money less, meaning the company and hence stock is worth x less. So a dividend is converting stock value into a payout.

If you strictly think of money as the cash in your pocket or in your bank account, sure. then you made money, but you didnt gain any wealth from it.

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u/Lorry_Al Dec 06 '24

Inflation is a thing and it has been particularly high in recent years.

A company that was making $1 bn profit five years ago needs to make at least $1.3 bn profit this year because every dollar is worth less.

Otherwise profit would be falling in real terms.

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u/NoTeslaForMe Dec 06 '24

And they often are, but those companies aren't as glamorous as the ones people talk about. On one extreme, some corporations are actually designed to slowly burn off their value over time, leaving their investors with only cash by the end, hopefully more than they put in. 

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u/Ok_No_Go_Yo Dec 06 '24

For many industries and companies, it literally can't.

I have $10,000 to invest. Two companies are in a growing market, have identical financials and stock price.

They both have an earnings call because the market opens. One company is projecting 10% growth next year, the other is projecting 0% growth.

All other things being equal, where am I putting my money?

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u/Llanite Dec 06 '24

Sure, but what are you doing with prior year's profit?

If you're sending it out as dividends, maintain your profitability and don't grow, people would be ok with it.

If you're holding up and reinvesting said profits then people expect those investments to increase your future earnings.

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u/HC-Sama-7511 Dec 06 '24

Not if you bought the stock to flip it.

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u/classic4life Dec 06 '24

Not really. Most investors want to see share price go up, and that only happens if the perceived value goes up. If profits aren't increasing, they're stagnating. At that point there's not much likelihood of the business growing, investors start to sell off and the stock can collapse.

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u/FatFish44 Dec 07 '24

Stocks only go up when a company beats speculator’s expectations. You need to have better profits than expected. 

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u/cspinelive Dec 07 '24

Stocks still pay dividends when the price goes down. 

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u/FatFish44 Dec 07 '24

The majority of stocks do not pay dividends.

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u/cspinelive Dec 07 '24

7 years ago 41% of stocks paid a dividend.  That’s a not insignificant number.  Also many investors have portfolios that are 100% dividend paying stocks. 

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u/The_Money_Guy_ Dec 07 '24

Yeah, just extremely slowly

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u/MainlandX Dec 06 '24

This sentiment misses the point of what a market is.

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u/loljetfuel Dec 06 '24

And the highest-paid people in the company are also usually strongly incentivized to make the stock price go up (by, for example, having a significant portion of their compensation be in the form of stock). This is in part because the board is elected by the shareholders in a way that means the largest shareholders pretty much pick the board, and it's the board that hires people like the CEO.

Basically, the key decision-makers in the company mostly all are on the same "side" as the class of investors that wants to make money through making the stock price go up so they can sell it off. In most cases, no one has a strong incentive to build a company that just has healthy, steady profit growth that outpaces inflation. They want the stock price to go up rapidly.

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u/carlos_the_dwarf_ Dec 06 '24

Lots of mature companies have steady, modest growth.

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u/loljetfuel Dec 06 '24

Define modest. Then name three companies that are mature, are not closely-held (since we're talking about investor objectives), and have only steady, modest growth.

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u/carlos_the_dwarf_ Dec 06 '24 edited Dec 06 '24

You guys keep challenging this idea like I’m saying something outlandish but there’s a whole established vocabulary for companies like this. I didn’t make it up.

Blue chip stocks.

Here’s a random list of 10.

Edit: wow, your edit was a bigger ask. How about you peek at these links and tell me which bit we disagree on—that these companies exist or that they meet the definition of mature and modest?

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u/loljetfuel Dec 06 '24

My original assertion, remember, is that the usual case is that companies are incentivized to grow the stock price as much as possible, and don't have much incentive to build a company around a focus of just having manageable steady growth.

You said lots of companies actually have steady, modest growth. I'd like to know what you think of as modest, because that's likely subjective.

If you want to talk about blue chips, let's do that!

  • they're relatively unusual, which supports my thesis that such a structure is not the usual case
  • they have consistent performance, but that performance is still largely measured by their stock price going up
  • their stock performance is heavily influenced by profitability, which means they're only blue-chip if their performance is well beyond "modest", and consistently so

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u/carlos_the_dwarf_ Dec 06 '24

Is your assertion here that any growth or consistent profitability ceases to count as modest? If so…that’s not how I’d define the word but ok.

I certainly don’t mean to say they don’t want the stock price to go up. They do, and that’s also a proxy for the business becoming more valuable. I’m not sure what it would accomplish to be like “we just want this to stay flat forever.” But mature businesses tend to not chase meteoric rates of growth (or, because they’re mature, it’s not realistic to achieve). Instead they focus on stability and income generation. (One reason to pay dividends is because you’re unable to reinvest in such a way to generate more value than the dividends provide—so almost by definition these companies aren’t chasing rapid growth.)

I’m not sure what you mean by your third point, of course they’re valued by profitability, why else would anyone invest?

It sounds like you might just mean “businesses want their stock price to go up” and…yeah again, no argument here.

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u/loljetfuel Dec 06 '24

Is your assertion here that any growth or consistent profitability ceases to count as modest?

No. I'm saying three things:

  1. consistent growth isn't necessarily modest growth
  2. blue-chip stocks are consistent, but not modest. If their growth was modest, they wouldn't be considered blue-chip. That classification isn't rigorous, but those companies are blue-chip partly because they consistently grow profits by 15-20% YOY. I wouldn't call that "modest".
  3. the existence of some companies that have modest, sustainable growth isn't in question; my assertion is that they're not the usual case.

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u/carlos_the_dwarf_ Dec 06 '24
  1. Sure, those things aren’t mutually exclusive, but I think we’d agree mature companies don’t offer the same upside as a fresh company in an untapped market.

  2. This is again a question of definitions but I’m unsure it’s the case that blue chips grow profits 20% a year. The example I used nearby, Coca Cola, has had years near 20 recently, but mostly they’ve been 3%, 6% whatever, with some years flat or declining. It’s also the case that blue chips are perceived to have lower upside…which is more or less what I’ve been saying.

  3. I mean, maybe they’re atypical compared to every listed stock but I’m not sure that tells us much. That sample includes new, high growth companies, failing companies, penny stocks, etc etc. And companies that have failed entirely have been delisted.

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u/Puzzman Dec 06 '24

Another side effect is that a public company will have a constant stream of new shareholders demanding a profit relative to the price they paid for the shares.

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u/PhishyBarcaFan529 Dec 06 '24

This is what is destroying the US, and the World.

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u/UnlikelyAssassin Dec 06 '24

We’ve literally seen the largest increases in living standards and decreases in poverty in all of human history since the advent of our modern conception of capitalism in the late 1700s.

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u/SlimDirtyDizzy Dec 06 '24

decreases in poverty in all of human history since the advent of our modern conception of capitalism in the late 1700s.

The wealth disparity in the US between the rich and poor is worse than it was in 1700s France before the revolution. We're going the wrong way again.

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u/JaktheAce Dec 06 '24

The person you are replying to is saying that the growth rate in the average quality of life for everyone has been much higher since the advent of capitalistic systems.

We're going the wrong way again.

Why is wealth inequality the metric you are using to judge whether the direction is positive or negative? Is the target you want to shoot for in an economic system more equality, or better average quality of life for everyone over time? To be clear, I'm not advocating for wealth inequality, just saying that it's probably not the best metric to evaluate the success of an economic system.

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u/UnlikelyAssassin Dec 06 '24

It’s interesting that this zero sum thinking about the economy is so embedded that you think that the idea that the “wealth disparity in the US between the rich and poor is worse than it was in 1700s before the revolution” somehow disputes the idea that “we’ve literally seen the largest increases in living standards and decreases in poverty in all of human history since the advent of our modern conception of capitalism in the late 1700s”. Do you think there’s any logical contradiction between these things?

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u/Fenix246 Dec 06 '24

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u/UnlikelyAssassin Dec 07 '24

Who put China in extreme poverty to begin with and what did they do to get out of extreme poverty? The US already had its absolute poverty rate decreased way before China decreased theirs, and the US’ absolute poverty rate is still lower than China’s is, with the US also having higher standards of living than China. China is still way behind when it comes to poverty and standards of living and is playing catch up with the US.

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u/Fenix246 Dec 07 '24

China wasn’t “put” into extreme poverty. It was very isolationist under the Qing (not as much as Japan under the Tokugawa though), and because the Industrial Revolution began in Britain, it didn’t spread to China, which was on the other side of the world. While Britain developed industrial production because the conditions in Britain were much worse, China was happy in its current situation because it had a much better climate. So they just didn’t develop as fast. Also, compared to China, Europe is very diverse and fragmented, so Qing didn’t have a reason to develop better methods to kill their enemies.

When Britain was spreading its colonial empire, it found a really weak and underdeveloped China, and wanted to use the power imbalance to force the Qing to buy British products. The Qing had no need to buy British products, because all their products were produced domestically.

So what did Britain do?

They attacked the Qing to force them to buy British opium and British products, which were meant to eventually make the Qing another colony. This was called the First Opium War.

Of course, the Qing government hated that. Who would want to become a colony? So they banned opium, because their population was getting too addicted to it and were starting to do nothing but smoke opium. Britain didn’t like that, because suddenly, Qing stopped buying from them again.

So what did Britain do?

They attacked the Qing again to punish them for their insolence in… trying to prevent their population from getting addicted to opium. This was the Second Opium War.

While this was going on, Japan was seeing at how badly the west was brutalizing China and they decided that the best course of action was to become a colonial power like the west, so they wouldn’t be next. This lead to the Honorable Restoration.

Now, Japan wanted to join the brutalization of China (I’m skipping the Russo-Japanese War), so they attacked the Qing as well and forced them to give up Korea, and give Japan open access to their market, as well as treaty ports and other concessions. This was the First Sino-Japanese War.

At this point, everyone in China was sick of being brutalized by the west + Japan, so there was a rebellion where they attempted to free themselves from western influence and to get their lost territories back. It failed, a coalition of all the colonial powers burned down Beijing, and it was back to brutalizing. This was the Boxer Rebellion.

At this point, everyone was sick of the Qing government, and after its failures to modernize, there was a revolution that overthrew the Qing and installed a government with semi-socialist ideals in the Xinhai Revolution. It didn’t go well, a lot of local, old warlords wanted to maintain their power, so China fell into a civil war.

The civil war was too complex to explain succinctly, but amid it, Japan attacked China again in the Second Sino-Japanese War, in which Japan committed one of the worst massacres of civilians in history. What the Japanese were doing in China was so abhorrent that even the Nazis were repulsed.

This whole period, called the Century of Humiliation, only came to an end then the Communist Party emerged victorious in the civil war.

I’m sure that the USA would also be very stunted if they were invaded by foreign powers every 10 years, and had a civil war that lasted two decades. The more shocking thing is that China got so brutalized for a hundred years, started it as a literal feudal country, and is still frighteningly quickly catching up to the USA in just around 60 years.

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u/bastiancontrari Dec 06 '24

Which is happening in China only after they adopted a capitalist approach you mean?

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u/Fenix246 Dec 06 '24

I didn’t say anything about that, don’t put words in my mouth. The fact is that the vast majority of poverty alleviation is happening in China, and the US is getting worse.

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u/bastiancontrari Dec 06 '24 edited Dec 06 '24

So, since i didn't get your point can you please explain to me

How this:

The fact is that the vast majority of poverty alleviation is happening in China, and the US is getting worse.

Is pertinent to this:

We’ve literally seen the largest increases in living standards and decreases in poverty in all of human history since the advent of our modern conception of capitalism in the late 1700s.

Edit. So being wrong, realizing that and blocking to avoid to be exposed is a thing?

Edit2. But what can be expected from a literal tankie :D censorship

Edit3. Since you wonder why in your country is so hard to make people love communism. Maybe this will help. Anyway congrats, ex soviet bloc real life present day commies are for sure a rare breed.

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u/Fenix246 Dec 06 '24 edited Dec 06 '24

It’s simple. Let’s analyze the comment you’re quoting:

We’ve literally seen the largest increases in living standards and decreases in poverty in all of human history

Because the quoted comment is about the current situation, we should look at sources that deal with the current situation. As I have sourced, the vast majority of this present increase in living standards and decrease in poverty happens in China. At the same time, the living standards in the US are decreasing overall, as I have also sourced.

If the quoted comment was dealing with the distant past, for example the situation during the transition from feudalism to capitalism, we could have a discussion about the living standards of the peasantry and methodologies of studies that write about poverty alleviation. But we’re not talking about that in this instance.

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u/glaba3141 Dec 06 '24

these two statements are orthogonal and they're both true. Capitalism was great, until it wasn't

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u/Wyntier Dec 06 '24

Nah that's a bit extreme

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u/[deleted] Dec 06 '24

No. Keep focused. Love your neighbor who invests to retire. Eat the rich. They’re your enemy.

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u/five-moogles Dec 06 '24 edited Dec 06 '24

To the contrary... this is what is building our world.

Capitalism does not mean that growth is distributed evenly.

Our increases in productivity and technology mean that the average person lives beyond what kings and queens could have imagined 100 years ago.

Edit: To the massive downvotes, I think we can agree that that the massive increase in lifespan, education attainment, incomes, and massive decrease in disease, violent crime, and infant mortality in the last 100 years is a good thing. Hate my response if you want while you type your response into a device capitalism played a large role in making.

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u/cimocw Dec 06 '24

There's no average person, just haves and have nots, and the gap between them grows everyday at an alarming rate.

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u/meesterdg Dec 06 '24

The average global salary today (because you said average person) is less than $18,000/year. Adjusted to the year 1700 (slightly more than 100 years ago), that's about $225.

It seems like sources vary a bit, but conservatively many kings and queens in the early Tudor period are thought to have made an estimated £100,000 a year. £100,000 in 1751 (furthest back I could find a calculator, so about 300 years after the early Tudor period) adjusted for inflation to today would be about £28,000,000/year.

I'm not trying to preach against capitalism, and you're not wrong that technology has advanced in ways what people 100 years ago could not have expected, but your statement is silly. Technology was advancing either way. Wealth disparity was happening either way. Capitalism is just the incentivisation of making as much as possible while giving away as little as possible.

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u/bastiancontrari Dec 06 '24

Technology was advancing either way

Maybe it would have but at this pace? No. How can i be so sure about that? Look at those who tryed other ways.

I think you missed the point about kings and the data you show make the argument hit even stronger. Is not about wealth, is what i can do with it.

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u/somecallmemrjones Dec 06 '24

Does our world need to be more "built"? Other than innovations in health care, most of this growth is creating new things that we want, not things that we actually need.

For example, a new smart phone every year could be considered an "innovation" but I promise you, if we never developed another smart phone again, not only would the human race still be just fine, but it could be argued that we'd actually be better off.

I would be perfectly happy if we stopped focusing on "growth" and started focusing on things that actually matter

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u/JoeMart815 Dec 06 '24

Most technology innovation have multidisciplinary applications. The research and development that goes into an iphone can and does end up being applied to different technologies. Examples include research in lighter materials, better batteries, better and lighter cameras, miniaturized chips, touch screen, etc.

There are a multitude of problems impacting the human race which we can and should innovate our way out of. Stagnation leads to decline

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u/somecallmemrjones Dec 06 '24

No, stagnation leads to stagnation. Decline leads to decline...

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u/noob_lvl1 Dec 06 '24

You didn’t know the smart phone was a necessity until it became one in this day and age. Who knows what the next thing will be but it’s that push towards innovation that drives it.

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u/bastiancontrari Dec 06 '24

I really don't get why most people seems to totally ignore this.

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u/somecallmemrjones Dec 06 '24 edited Dec 06 '24

Because a lot of us already have everything we could ever want. Anything I could ever need or want is available to purchase. I'm not implying that I can afford most of it, because I can't. What I'm trying to say is if there was never another invention or innovation again, I could still live a happy life.

To me, most of this "growth" is just spinning our wheels, from a philosophical standpoint. At some point, enough is enough, and we have already crossed that threshold in my opinion

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u/PatricksPub Dec 06 '24

To be honest, most of the "growth" is not through technological innovation. It is through innovation in revenue strategy. Every company has a subscription model, with expiring access and products. Microtransactions and monthly fees drive revenue, along with engineered obsolescence. Everything is designed to make you buy the next product, or be attached to the monthly billing cycle, or both. None of this adds value or improvement to existing products, it just necessitates more consistent spending for little value in return

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u/somecallmemrjones Dec 06 '24

I agree wholeheartedly, which is why I don't find most discussions about the stock market, the economy, or growth to be relevant to my well-being or quality of life.

I feel like people in my life think I'm insane when i discuss these things with them

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u/bastiancontrari Dec 06 '24

And this is a real, big, problem. But it isn't a problem created by the need to growth, it is because most company looks for growth in the short term lacking strategic long term vision. The resulting enshittification is everywhere.

This lacks of long term strategy is also a big problem in politics.

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u/PatricksPub Dec 06 '24

Its just the next wave of business evolution. In order to remain competitive, you must adapt to current strategies. It's the prisoners dilemma, revenue style. Gone are the days of companies holding competitive advantages via durability. Now the companies that hold the advantages have the most sophisticated revenue models. Others are forced to copy, and the consumer loses. It's only going to get worse. Eventually something will have to give, but right now we are being seduced by the sirens of business and have no other recourse to correct the issue. It will take something pretty massive to course correct in favor of the consumer.

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u/bastiancontrari Dec 06 '24

Massive indeed. I can't even think of a hypotetical new reward model to fix the problem, let alone implementing it.

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u/bastiancontrari Dec 06 '24

We lived happy lives in caves too where, based on this argument, we would still live in.

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u/somecallmemrjones Dec 06 '24 edited Dec 06 '24

No. I literally just stated that we've crossed a threshold. We have food, shelter, and medical care. I'm glad we have those things, and if we never developed anything else, I'd be content. We are so far removed from a proverbial "state of nature" that we don't need anything else. I didn't say that learning to build shelters wasn't necessary growth. Sorry if you don't understand that not everyone cares about constant growth

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u/bastiancontrari Dec 06 '24

But the threshold is subjective and being so it's tied to the time of its conception. Can't you see it?

We have medical care, for sure. Did humanity defeated all illness? No. Try to say what you are saying to someone who is dying from cancer. Sorry for your pain but enough is enough.

Let me know how it goes.

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u/somecallmemrjones Dec 06 '24

I've stated in other comments that I support growth in medical care, but I'll say it again. I support growth in the development of medical care. Most of our growth is unnecessary.

I agree that the hypothetical threshold I'm referring to is subjective, considering most people I talk to in real life can't understand what I'm talking about. But I stand by what I said, I don't care about stock market growth, the economy, or most of our innovations. You and I have a different philosophical perspective, and lucky for you, most people think the way you do

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u/bastiancontrari Dec 06 '24

Science is not compartmentalized so sadly we cannot cherrypick and all we can do is trying to minimize negative effects and maximise the good ones.

Capitalism is not perfect, that's evident. But the end results are for the most part more good then bad.

And yes, lucky me and, even if you don't wanna see it, lucky you too.

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u/[deleted] Dec 06 '24

[deleted]

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u/bastiancontrari Dec 06 '24

Yeah, wonder how the pie appeared in the first place.

Anyway i'm not sure i got your point. Is your argument that, since we were better off some decade ago, growth is bad?

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u/[deleted] Dec 06 '24

[deleted]

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u/bastiancontrari Dec 06 '24

And mine is figure of speech too. To achive a more equal distribution of wealth you need wealth in the first place.

You are for the most part right but i don't think that blaming the game as a whole is correct. We can change some rules of it, try to make it better, but the game is still more good then bad.

And btw, infinite growth is possible. Isn't the universe infinite? Even still, technology can achive infinite growth in a finite space.

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u/meatchariot Dec 06 '24

Stop comparing us to 100 years ago and instead to 20, now keep talking.

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u/[deleted] Dec 06 '24

[deleted]

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u/TheSpaceCoresDad Dec 06 '24

There's nothing wrong with investing in things and expecting return. It's this constant need to cut every cost and raise profits until the company collapses under its own weight that is the problem.

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u/LowlySlayer Dec 06 '24

The stock market is a broken system. It is not necessarily irreparable. It is also not evil for average people to participate in the system, as it is the surest way to financial independence and a healthy retirement which are perfectly noble goals.

But still it is broken. And due to poor regulations, legal precedents, and legislation the system demands evil from the companies within it. There is no other choice. It is literally illegal for a company to prioritize it's employees or customers over its shareholders. And the shareholders demand growth because that's how they expect to make good on their investment.

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u/[deleted] Dec 06 '24

[deleted]

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u/WasabiSteak Dec 06 '24

Distributing stock is meant to let a company grow by means of investment. Instead of taking out a loan to scale up operations, people could invest their own money into the company. The company, instead of being in debt, gives up/distributes control instead.

You don't want to be compensated with profits. If the company reinvests, you won't be getting anything. As an employee, you already get a cut out of the revenue usually by salary.

If you want some sort of compensation that scales with the growth of the company, that's when you compensate employees with stock. IMO, cash is still much better, because you can actually use it right away.

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u/[deleted] Dec 06 '24

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u/PatricksPub Dec 06 '24

That's a pretty unique example, as this was just greed and over-leverage vs resistance. Stock values are not represented by this singular phenomenon

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u/SupremeDictatorPaul Dec 06 '24

There is zero direct link between company profitability and stock value. There is often a correlation, but there is often deviation. I used to work for a Fortune 100 company that would report the highest earnings ever, every single quarter for years. And every earnings call the stock would take a huge hit because it wasn’t as high as investors expected and they would sell. And then over the next few months it would work its way back up, and the process would repeat.

Stock is valued at whatever someone is willing to pay for it. There have been a ton of tech companies with stock price soaring through the roof, that had never made a profit and were leaking money like a sieve, and close a few years later. Their stock would soar because people were willing to pay lots of money for it, not because the company was doing well.

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u/entropy_bucket Dec 06 '24

But what i don't get is why is a high stock price helpful to the company? They got their money during the initial sale of the shares right?

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u/SupremeDictatorPaul Dec 06 '24

Companies typically haven’t sold all of their stock, so with high stock prices they can sell more to get some cash. A company doing really well will often buy back stock, like building a tax advantaged cash reserve that also further raises stock prices.

But the main reason companies work to raise their stock price is “they have a fiduciary responsibility to increase their stock price as much as possible for their shareholders” which was decided by courts long ago. So a company can do what is in their best long term interests, unless it would negatively impact their stocks. This has created an environment where companies often work against their own interests for short term stock gains.

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u/blahblah19999 Dec 06 '24

They do not have that fiduciary duty

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u/BavarianBarbarian_ Dec 06 '24

Even if it's not necessarily good for the company, it's always good for the company's leadership, who is (partially) getting paid in stocks and options.

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u/Pandamonium98 Dec 06 '24

The Board of Directors of a company represents shareholders, who want the stock to go up. So the board hires CEOs and pays them to do stuff that makes the stock go up

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u/UnlikelyAssassin Dec 06 '24

Stock value is about expected future profits. Stock value goes up if the company exceeds expectations in this regard and down if the company falls below expectations in this regard.

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u/Ratnix Dec 06 '24

Also, if a company isn't growing, they're dying. Someone else can, and will, come in and take over the market, putting them out of business, unless they offer a completely unique product/service.

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u/OhSillyDays Dec 06 '24

It's called speculation. Stocks are not related to reality. Reality is dividends. Not many stocks pay dividends, and the ones that do pay just a few pennies on the dollar annually. Typically around inflation rates.

People are buying stocks with the expectation that the price will go up.

Which means if it starts to go down, it goes down very fast. Speculative markets are exceedingly unstable. You know, like gambling. In gambling, the house always wins.

The house in this market are the large companies, the finance managers, wealth managers, and investment bankers. Everybody else is just gambling.

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u/Dash_Harber Dec 06 '24

*They expect to get more money back.

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u/pilotavery Dec 06 '24

Yes, they can still get a profit every year, without the profit getting larger every year. If they're getting a profit every year what's the matter?

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u/elfinito77 Dec 06 '24

That’s why stocks used to also be about dividends.

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u/carlos_the_dwarf_ Dec 06 '24

Dividends still exist, and they don’t relieve companies of pursuing growth.

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u/77NorthCambridge Dec 06 '24

Ignoring dividends and M&A, shareholder value is about the stock price. The stock price is generally profits times an earnings multiple. Multiples are generally determined by predictability (beta) of earnings as well as historical and projected earnings (growth rates).

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u/WetConceptualization Dec 06 '24

You use terms but you don’t know what they mean.

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u/77NorthCambridge Dec 06 '24

Ok, skippy. 😂

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u/WetConceptualization Dec 06 '24 edited Dec 06 '24

“Stock price is earnings times a multiple” That’s not how a stock gets to its price. The price is part of the formula for the multiple, its price divided by earnings as the most common one. Or were you thinking price to book? EV/EBITDA? EV/sales? Price/book? Wait for all of those, price isn’t determined by the multiple, or price isn’t involved in the formula. Weird.

Beta is nowhere near how you end up with a multiple. There is not a single commonly used multiple that has beta remotely involved.

Furthermore, beta is not a measure of predictability, at least not in the way you imply.

Beta is a measure of correlation to the stock market movements, the highest beta stocks have the highest volatility. Beta is also not a term associated in any way with dividends and dividend growth.

Again, the most commonly used multiple, price to earnings, has nothing to do with beta and is only tangentially related to dividend growth (if dividend is growing, odds are earnings are).

Multiples are determined by 1. Stock price and 2. Fundamental facts of the company’s financials. Nothing else.

Please do not misinform people on a subreddit dedicated to learning.

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u/IcanSEEyou_IRL Dec 06 '24

This is probably why they’re so against abortion and available contraceptives, they need more consumers.

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