[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.