If a company is “profitable” over a long period of time that PROBABLY means it is “well run” or “managed properly.”<\/p>\n\n\n\n
Of course we need to define “long period of time” — in a healthy economy companies will come and go just by the natural cultural shifts and technological advances. <\/p>\n\n\n\n
e.g. Thirty years ago multiple companies making a nice profit from selling “long distance” phone service. Then the “interweb” exploded and “cell phones” became ubiquitous and I’m not sure anyone sells “long distance” phone service anymore.<\/p>\n\n\n\n
the price of whatever “product\/service” that “profitable company” makes is gonna be influenced by a wide range of variables<\/p>\n\n\n\n
A company can’t “lose a little money” on each transaction and expect to stay in business – so MOST reasonable people can appreciate that the idea of “profit” is not evil. However calculating acceptable “profit margins” (in the real world) is harder than plugging numbers into a formula (something like “profit = (revenue – cost)\/revenue”)<\/p>\n\n\n\n
First – the sector\/industry which the company is competing influences the idea of acceptable “profit margins.” <\/p>\n\n\n\n
e.g. the “oil industry” has to include some % to finding\/acquiring “more oil” – the “lumber industry” has to include some % to “planting trees” – the “pharmaceutical industry” has to include some % for “research, development, and approval” of new drugs<\/p>\n\n\n\n
Second – “marginal utility” comes into play and really messes with “prices.” <\/p>\n\n\n\n
How much “the market” is willing to pay for a product is influenced by how much of that product they “need.”<\/p>\n\n\n\n
Remember there is a difference between “need” and “want.” Real “needs” are things like food\/water\/shelter. Needs are (relatively) limited. “Wants” on the other hand are unlimited – but will vary wildly between individuals.<\/p>\n\n\n\n
e.g. an individual that is hungry, cold, and lost in the wilderness would be willing to pay much more for a “plate of beans by the fire” than someone that is living in a nice warm house with plenty of food.<\/p>\n\n\n\n
The “value” of diamonds and water are another classic example – if you are dying of thirst, you will “pay” for water and (probably) aren’t concerned with diamonds of any quality. But if you have all the water you need (you know, it tends to fall out of the sky in certain places) – then “shiny things” like diamonds are worth a lot more.<\/p>\n\n\n\n
Of course just because “water” can be obtained for free – that doesn’t mean there isn’t a “market” for water. The problem with water is that it is easily contaminated. Historically “dirty water” has been the cause of a LOT of epidemics – which is another subject. <\/p>\n\n\n\n
“Water” may be obtained for “free” – but “clean potable water” doesn’t happen by accident. SO “bottled water” is its own little industry. The larger point being that the “product cost” is not directly linked to the “product price.”<\/p>\n\n\n\n
The same would be true for diamonds – i.e. raw diamonds require some additional work to become “jewelry.” <\/p>\n\n\n\n
SO with any product the company selling the products has other “production costs” than just “materials.” <\/p>\n\n\n\n
If those additional costs are managed poorly – then a product that costs $0 could be sold for “$large number” and the company might NOT be “profitable.” <\/p>\n\n\n\n
OR if those additional costs are managed properly – then the “total cost of production” might be lower so the “product price” might be lower AND the company would be “profitable.”<\/p>\n\n\n\n
Of course it is also possible for a company to have “record profits” despite poor management — but those tend to be short lived “bubbles.”<\/p>\n\n\n\n
As for the stock market: what the “stock market investor” wants to see in a company is “slow and steady” long term growth. Meanwhile the “stock market speculator” is looking for “wild swings” in profits. <\/p>\n\n\n\n
The “intelligent investor” will do more “investing” than “speculation” – I think someone won a Nobel Prize in economics for pointing out that “diversification” was a good thing – which is basically saying that a little “speculation” is a good thing for “long term profits.” This is why “investment professionals” will talk about “risk appetite.”<\/p>\n\n\n\n
In an ideal case our ‘well managed company’ would see slow and steady profit growth year over year. Each year may not set a new “record” for profits, but the graph line would be sloping upwards.<\/p>\n\n\n\n
While that “hot new company” in an “emerging industry” PROBABLY won’t show profits at all for the first few years – but that doesn’t mean an investor shouldn’t risk a small % …<\/p>\n\n\n\n
SO “diversification” is going to look differently for different investors at different points in their lifetime – but the “big idea” is that (from a financial planning point of view) you should never put EVERYTHING into anything … <\/p>\n\n\n\n
My internal alarms start going off anytime a “government official” starts talking about a company\/industry having “record profits” and how this isn’t “fair” to the public.<\/p>\n\n\n\n
Well, we have the “history of socialism\/communism in the 20th Century” to point out the dangers of “centrally planned economies.” <\/p>\n\n\n\n
If you want to argue that the USSR and Maoist China were not “true communism” – fine. I understand the difference between the “speculative economics” that Karl Marx wrote about and the “real world implementation” of tyranny done under his name – that isn’t the point.<\/p>\n\n\n\n
The point is that any human government intervention into individual sectors of the economy tends to be counterproductive. Modern economies are vast and complex and change at a pace faster than human government and effectively regulate.<\/p>\n\n\n\n
I can appreciate the goal of “fairness” – but the problem is human nature and “information flow.” Is the purpose of government is NOT to make society “fair.” That simply is not possible with human government. <\/p>\n\n\n\n
I’m not questioning the “intent” of attempts at socialism – I’m pointing out the failures of trying to arbitrarily change human nature and the problems of “scarcity.”<\/p>\n\n\n\n
Mr Marx expected “capitalism” to solve the “scarcity” problem – and then “communism” would happen naturally. I tend to disagree with his hypothesis that if all of humanities basic needs were met that we would live together in peace and harmony – again, “human nature” comes into play. <\/p>\n\n\n\n
But it is pretty to think that Mr Marx wasn’t completely wrong (but again, 20th Century history isn’t on his side)<\/p>\n\n\n\n The most terrifying words in the English language are: I’m from the government and I’m here to help.<\/p>Ronald Reagan<\/cite><\/blockquote><\/figure>\n\n\n\n All of which means that by the time “government reacts” the problem has probably changed and any government regulation is going to be pointless and ineffective. <\/p>\n\n\n\n This is why “do something” legislation after a “disaster” might actually make the root problem worse — and “don’t make things worse” is probably a good goal for any human government.<\/p>\n\n\n\n Of course being able to tell the difference between “we must act now” and “it is better to do nothing” is VERY hard. It does illustrate why “politicians” tend to be despised and true “statesmen”\/leaders are few and far between …<\/p>\n","protected":false},"excerpt":{"rendered":" If a company is “profitable” over a long period of time that PROBABLY means it is “well run” or “managed properly.” Of course we need to define “long period of time” — in a healthy economy companies will come and go just by the natural cultural shifts and technological advances. e.g. Thirty years ago multiple […]<\/p>\n","protected":false},"author":2,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[2,6,7],"tags":[],"class_list":["post-576","post","type-post","status-publish","format-standard","hentry","category-business","category-history","category-leadership"],"_links":{"self":[{"href":"https:\/\/www.iterudio.com\/index.php?rest_route=\/wp\/v2\/posts\/576","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.iterudio.com\/index.php?rest_route=\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.iterudio.com\/index.php?rest_route=\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.iterudio.com\/index.php?rest_route=\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/www.iterudio.com\/index.php?rest_route=%2Fwp%2Fv2%2Fcomments&post=576"}],"version-history":[{"count":2,"href":"https:\/\/www.iterudio.com\/index.php?rest_route=\/wp\/v2\/posts\/576\/revisions"}],"predecessor-version":[{"id":578,"href":"https:\/\/www.iterudio.com\/index.php?rest_route=\/wp\/v2\/posts\/576\/revisions\/578"}],"wp:attachment":[{"href":"https:\/\/www.iterudio.com\/index.php?rest_route=%2Fwp%2Fv2%2Fmedia&parent=576"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.iterudio.com\/index.php?rest_route=%2Fwp%2Fv2%2Fcategories&post=576"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.iterudio.com\/index.php?rest_route=%2Fwp%2Fv2%2Ftags&post=576"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}