Tuesday, October 11, 2011

What's wrong with modern American economics.

According to this, Google stock may take a hit because their revenues only grew year-over-year by 30% this past quarter. Specifically, analysts are worried because Larry Page said that he cares more about the long term health of the company than goosing the stock price.  

What the hell is wrong with these people?  It's not enough that Google is making enormous profits.  It's not enough that Google's enormous revenues are 30% larger than they were last year.  Rather, apparently the free market will penalize Google because they expected the earnings to be 32% larger than last year, and it's apparently a bad thing that the management has talked about prioritizing long-term health and growth.   How is this attitude by the financial sector at all a good thing?  This attitude is exactly why corporate long-term R&D has been nearly obliterated in the US.

6 comments:

Janne said...

Issues aside that the stock market is far from rational and all the other problems:

These kind of news "stock falls after good earnings report" is often misunderstood. The point is that the current stock price has already expectations about the future priced in. So if the actual data deviates from the expectations, the stock price gets corrected (up or down).

Then in today's environment with high speed, high volume automatic trading going on, any changes based on news can get an disproportionate response in the stock price, but this and similar issues is again a different problem.

The real problem in my view is when the company leadership is focused on the stock price at any cost, as you also note... but this is exactly not what Google is doing.

Doug Natelson said...

I understand that the market already "prices in" expectations. Here's my issue.

There was a time when people who purchased stock in publicly held companies were happy if the company made money. The stock price would go up, and the company would pay dividends to shareholders. Then we decided that making money wasn't good enough - the company had to be on a path where they were making more money this year than last year. So we go from "value" based on earnings to value based on d(earnings)/dt. Then we figured that we really needed to get ahead of the curve and look at whether earnings growth was increasing or slowing, so we now have "value" based on our estimates of d^2(earnings)/dt^2.

Note that the premium placed on ever-increasing growth rates basically means the market tends to shift value to companies in super-geometric growth, a stage that *has* to be ephemeral, since no company can grow in an unbounded way at an ever increasing growth rate.

This is the exact opposite of rewarding long-term investment. I don't think it's at all clear that intense pursuit of immediate profit automatically yields what's best for companies or the economy as a whole in the long term.

Brad Holden said...

Pay no attention to daily share movements, they are most likely being driven by computers in Newark, not human beings.

And, as I write this, Google is up $7 from yesterday.

That said, I do agree that options for chief officer performance has made a huge negative impact on companies behaviour.

Igor Fridman said...

Stocks are about speculation, and that's all this is.

Tom said...

I recently read a story about shareholders wanting a company t spend less on R&D so that it could return that money to the shareholders. That IS effed up.

But stock price and running the company aren't necessarily strongly coupled. The stock is traded between individuals, not really from the company.

If the stock is unduly punished, Google has enough cash to buy up some of its own stock and "return value" to its shareholders that way.

Anonymous said...

I'll play Devil's advocate here Doug even though I agree with you.

The choice of short term gain over long term profits may not be as simple, or naive, as a choice as you make it out to be, and you may be right for the wrong reasons. Growing fast or having large short term profits may be essential for long term growth, when compounded over many such short spurts -- and indeed, one may need large short term profits to finance long term growth. But, as the saying goes, we're all dead in the long term, and moreover, if one does not have short term funds to adapt to unforseen future long term trends, then one is dead as a company.

Investors or analysts, thus, may _not_ be worried because Larry Page cares more about long term health/growth, but that he said that he does over short term growth, and thus _may_ indicate to these analysts that he is a naive CEO, which may have an _actual_ impact, ironically, on long term performance