[hammock]

Why does this idea exist that every company needs to be sustainable? Is it not the natural way of markets that 1) an opportunity is identified, 2) exploited for profit, until 3) competition drives profitability away?

So long as capital stays productive, from a societal point of view it shouldn't matter whether it stays in one company for 20 years or moves from company to company every three.

[nkohari]

Finance doesn't work that way at all, though.

Capital is invested because of the potential of growth, and therefore return. You wouldn't buy stock in a company at $10 if you expected it to be worth $10 for the entire time you held the shares.

It's not like the people who bought ZNGA stock at $10 were somehow rewarded with $7 worth of stock in some other company when their shares dipped to $3.

[wtvanhest]

Actually it does work that way. If I thought that 3 companies with questionable business models each had a 50% chance of becoming worth 3X their valuation in 2 years, it would probably make sense for me to invest in all 3 even if it meant they also each had a 50% chance of becoming worth zero in 2 years.

Finance is very much built around the concepts of diversification and risk taking.

[jasonlotito]

> Actually it does work that way.

And then you go on to provide an example completely opposite of what he was saying.

[wtvanhest]

I took both the poster I replied to and the poster above his under consideration when I replied. Finance doesn't require all companies be sustainable, only that some companies grow enough to offset losses taken on unsustainable companies.

It is a general principal of how investments work.

[nkohari]

In my understanding, the person I was replying to was saying that the actual value of equity isn't relevant, because capital cycles through the economy. I was saying that was absolutely not true, because the only reasons anyone would buy equity is to either 1) because they expect the equity to appreciate in value, or 2) to receive dividends or profit-sharing of some kind.

The situation you described is a reasonable diversification strategy, but you had the expectation of appreciation with each purchase. You hedged your bet, and lost less, but you still believed that each position would appreciate in value.

[wtvanhest]

I believe the OP is referring to the industry life cycle. http://www.investopedia.com/exam-guide/cfa-level-1/equity-in...

If the OP is referring to that cycle, his question seems valid to me. Investors choose companies at various stages because they believe they will “exit” (not just VCs, all investors) at a higher level than today. When a company gets to the end of an industry life cycle, their price/earnings multiple is compressed and “value” investors step in thinking their new strategy will let them enter a new market etc.

Every investor is taking risk and whether the timelines are short 2 to 3 years or long 3 to 10 years before the investor expects the company to go in to decline, every professional investor understands that someday the vast majority of the businesses they invested in will fail. (I’m talking about every type of investor, even stable growth mutual funds). Even if that means it takes 20 years to fail.

I understand my point is highly nuanced and somewhat theoretical, but it is grounded in finance literature and the OP’s question seemed more valid than deserving the response, “that’s not how finance works”. I guess I was hoping someone smarter than I would come along and propose some new framework or possibly add some insight so I rebutted your post.

[brazzy]

> You wouldn't buy stock in a company at $10 if you expected it to be worth $10 for the entire time you held the shares.

Yes, you very much would, if you had reason to expect that company to be willing and able to regularly pay out dividends - model for returns that does not depend on growth and is thus sustainable (nothing grows forever).

[brc]

I agree in a way - while it's unfortunate to those involved, there is an efficiency at work when capital is moved from those with no idea to those with some idea. Obviously the less idea someone has, the faster the capital departs them (a fool and his money are one big party).

However, I think the problem here is one of time horizons - many people invest in companies expecting them to be longer-term sustainable entities rather than harvest-the-craze entities. But as long as that's a function of lack of investor chops rather than market disinformation, ultimately it's a good thing.

[taphangum]

Sustainability is the ideal that (hopefully) we all strive for, because of the many negative effects of unsustainable business in the long term. Such as laying people off.

Good point though.

[im3w1l]

I totally agree with you in theory, but in practice, most companies are valued as if they would generate profit for a long time.

At its core it's a failure of the investors.

[adgar2]

Exactly. Money exists to be extracted from fools at their expense, whether those fools are your investors, employees, customers, or all 3. That's real value in the market at work.