[solve]

The goal is to maximize the predicted expected value of the stock price, based on all possible sources of value captured by the company, over an effectively infinite time horizon. Absolutely nothing else takes priority over that, except a few risk controls.

The word "need" should never be said in this context. Maximizing expected value of the stock price through whatever means necessary is all that matters in this context.

There is no requirement to meet profitability within a human lifetime. The timescale is effectively infinite, in many cases, and particularly the highest value cases that professional investors focus on. See Amazon, see NYC apartment rental costs versus purchase costs, etc.

What's the simple formula for valuing a company? Nonsense, no simple formula should ever exist, if the markets are functioning properly.

[tinkerdol]

Thank you for your response.

That's an interesting point, about an effectively infinite timescale, but to play devil's advocate, it can't be true. Greater than a human lifetime? Sure, but not infinite. Therefore, what timescales are we talking about and for which different types of businesses?

To use your examples, I don't think anyone is expecting Amazon to be huge in 500 years. Or, if you don't agree with me, change that number to 5000 or 50,000 (point being, there is a limit). Therefore, it wouldn't make sense to indefinitely pour in investments as we wait for its successor or the singularity to take over; what is the litmus test to see if a company is actually healthy in the meantime? Let's define "healthy" as eventually returning more value than its investments, if you agree that the definition makes sense.

Could you also expand on your last point? >Nonsense, no simple formula should ever exist, if the markets are functioning properly.

I'm not sure what that means.

[Retric]

Time value of money is generally used to account for this. If you discount future cash flows by ex: 5%/year then a steady income of 1$/year forever is not worth infinite money. Instead it's worth ~20$ and you capture 1/2 of that in the first 14 years.

Another approach is to assume a rate of failure etc, and build a more complex model, but it averages out to some discount on future cash flows.

[Scarblac]

> a steady income of 1$/year forever is not worth infinite money. Instead it's worth ~20$ and you capture 1/2 of that in the first 14 years.

You'd capture 14$ in the first 14 years...

[Retric]

In this model, the dollar you capture 14 years from now is woth .95^14 dollars. For simplicity let's assume your stock is going to creat 1$ 1 year from now. How much is that worth today?

Well if you sold a bond today for 95cents with the agreement to give a dollar in 1 year then next years dollar is worth 95 cents. Well what if you sold 2 bonds this year and one next year, you effectivly move up the future cash flow for the next two years at a discount that keeps getting larger the further back in time you pull the money.

[Scarblac]

Ah, I missed something. Thanks for the explanation!

[eli_gottlieb]

The time-scale should most definitely not be infinite, considering that most corporations don't last more than 50 years in any given particular ownership structure or charter (that is, within 50 years, most companies undergo a buy-out, merger, pivot, corporate raid, etc.).

[solve]

Where did I say that companies survive for an infinite amount of time? I didn't say anything like that at all.