It’s very hard to argue with most of this—directionally, companies/CEOs are sub-optimized towards good products or profit. Personally, I’m interested in what you think going forward from this. Specifically, questioning the idea that investors will or even want to suss out bad long term business and, relatedly, given zirp or post-zirp. More broadly, there are many reasons to think of the line being much blurrier between C-suite and investors than we’re giving credit for. The CEO is much more on team investor than team company (with their employees), incentive-wise and even socially. Perhaps you view public companies vs startups as meaningfully different for the point you’re making, could be. But there are many many companies making and selling things very unprofitably explicitly to get an exit before ever having to solve or deal with getting in the black. This is Plan A or a very desirable Plan B . Even public companies have any number of champions for an argument of short term stock price mattering to investors more than long term sustainability (Tesla, GameStop, etc). Maybe those examples feel too trifling, but I’m not sure why we should default expect investors to be long term oriented. Even if the companies eventually make good a decade or two from now, the investors would almost certainly have done better to just jump between the short term wins. You could argue they don’t have the intel to do this well—though this is easier when the execs and investors are “aligned”—but that wouldn’t explain choices of buying into stocks with distorted PE ratios.
You’re right on about questioning who or why leaders become leaders I think. But I’m not sure I agree that their “weaknesses” aren’t actually helping them. They seem to do quite well. Often even when their companies “fail.”
Yes, so there's a power law distribution at work here, where a small handful of really large and profitable companies account for the majority of corporate profits. Like Apple I think is 5% of the S&P, the top 5 are maybe 20% of the total, the top 100 are like half or three quarters. Non-S&P 500 public companies are like < 25% of public company value I think. (I'm not going to look it up right now, but I think that's all in the range.) Basically there have always been investor fads and speculation but all of the stuff that happens to Gamestop-type companies generally has very little economic meaning.
The other question here goes back to Keynes's beauty contest, and the answer is that the combined efforts of speculators playing the greater fool game has to be zero at best, and more likely less than zero to the extent they inevitably get exploited by longer-term investors who can buy the undervalued unloved stocks and sell the fad stocks (and generally avoid frictional cost).
Not to imply long-term investing is easy but that is the larger trend. I wouldn't say investors are default long term oriented by any means but investor returns are driven by the ~$2 trillion a year of profits that companies return to investors or reinvest and so it doesn't end up mattering as much what or how investors think, they will get what they get regardless.
Nice! The Boyle book was interesting insofar as a lot of the specific predictions were wrong -- e.g. he framed the aircraft engine business as slipping toward failure, falling behind P&W and R-R but in fact it was on its way to being the global leader by far. Also he missed the problems with the finance business, iirc.
Gelles has said he was inspired by Boyle, and he definitely repeats a lot of Boyle's mistakes (blaming Welch for deindustrialzation is a big one) despite having the advantage of hindsight, which I think is what makes it so jarring -- it makes it feel like he didn't do much research at all.
I think journalists don't appreciate how easy it is to fall for debunked incoherent folk theories and they end up writing these books which they think are original and insightful but really aren't that interesting. But then, the same was true for Welch!
Welch's failures can partially be blamed on his incentives but if you're going to dedicate months or years of your life to a story you should be more rigorous-journalists should do better!
It’s very hard to argue with most of this—directionally, companies/CEOs are sub-optimized towards good products or profit. Personally, I’m interested in what you think going forward from this. Specifically, questioning the idea that investors will or even want to suss out bad long term business and, relatedly, given zirp or post-zirp. More broadly, there are many reasons to think of the line being much blurrier between C-suite and investors than we’re giving credit for. The CEO is much more on team investor than team company (with their employees), incentive-wise and even socially. Perhaps you view public companies vs startups as meaningfully different for the point you’re making, could be. But there are many many companies making and selling things very unprofitably explicitly to get an exit before ever having to solve or deal with getting in the black. This is Plan A or a very desirable Plan B . Even public companies have any number of champions for an argument of short term stock price mattering to investors more than long term sustainability (Tesla, GameStop, etc). Maybe those examples feel too trifling, but I’m not sure why we should default expect investors to be long term oriented. Even if the companies eventually make good a decade or two from now, the investors would almost certainly have done better to just jump between the short term wins. You could argue they don’t have the intel to do this well—though this is easier when the execs and investors are “aligned”—but that wouldn’t explain choices of buying into stocks with distorted PE ratios.
You’re right on about questioning who or why leaders become leaders I think. But I’m not sure I agree that their “weaknesses” aren’t actually helping them. They seem to do quite well. Often even when their companies “fail.”
Yes, so there's a power law distribution at work here, where a small handful of really large and profitable companies account for the majority of corporate profits. Like Apple I think is 5% of the S&P, the top 5 are maybe 20% of the total, the top 100 are like half or three quarters. Non-S&P 500 public companies are like < 25% of public company value I think. (I'm not going to look it up right now, but I think that's all in the range.) Basically there have always been investor fads and speculation but all of the stuff that happens to Gamestop-type companies generally has very little economic meaning.
The other question here goes back to Keynes's beauty contest, and the answer is that the combined efforts of speculators playing the greater fool game has to be zero at best, and more likely less than zero to the extent they inevitably get exploited by longer-term investors who can buy the undervalued unloved stocks and sell the fad stocks (and generally avoid frictional cost).
Not to imply long-term investing is easy but that is the larger trend. I wouldn't say investors are default long term oriented by any means but investor returns are driven by the ~$2 trillion a year of profits that companies return to investors or reinvest and so it doesn't end up mattering as much what or how investors think, they will get what they get regardless.
I wrote a review of Thomas Boyle's book: https://enterprisevalue.substack.com/p/foreseeing-ges-fall
Nice! The Boyle book was interesting insofar as a lot of the specific predictions were wrong -- e.g. he framed the aircraft engine business as slipping toward failure, falling behind P&W and R-R but in fact it was on its way to being the global leader by far. Also he missed the problems with the finance business, iirc.
Gelles has said he was inspired by Boyle, and he definitely repeats a lot of Boyle's mistakes (blaming Welch for deindustrialzation is a big one) despite having the advantage of hindsight, which I think is what makes it so jarring -- it makes it feel like he didn't do much research at all.
I think journalists don't appreciate how easy it is to fall for debunked incoherent folk theories and they end up writing these books which they think are original and insightful but really aren't that interesting. But then, the same was true for Welch!
Welch's failures can partially be blamed on his incentives but if you're going to dedicate months or years of your life to a story you should be more rigorous-journalists should do better!
Enjoyed the write up. Thanks for sharing.