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Comment by Touche | Hacker News Reader

Yahoo was sustainable and profitable. They weren't as big as Google or Amazon but they made a lot of money. But that wasn't good enough for the investors or the public, who want infinite growth.

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Sure, but looking at their historic revenue, you're going from ~1.8B between 2007 - 2009 down to ~1.1B 2011-present[1]. In fact, their latest quarter for Mar 2016 only netted them 1.08B.

This is a ton of money and I reckon they could last a long time on it, but I believe the investor-mindset is something like "if you're not growing, you're dying" and if you're dying, you should probably sell at your peak. Looking at Yahoo revenue, it's clear they're dying and as a result, I wouldn't paint this as just greedy investors being greedy.

[1] - https://ycharts.com/companies/YHOO/revenues

As an occasional investor if a company isn't growing then I'd say we want it to make profits in the old fashioned manner of sales exceeding expenses. Yahoo was struggling a bit there. If you look at the earnings of the previous years there was quite a lot of funny stuff relating to Yahoo Japan rather than straightforward profits from happy customers.

It's not too complicated: if you don't pay a reliable dividend you need to have growth to keep investors happy. Yahoo's profitable businesses have been shrinking and they have been unable to find new ones to replace them.

It's an inherent risk of being publicly traded. Imagine a company with perfectly stable profits, unlikely to change in any direction. If some part of the market develops a collective delusion about that company being a prime growth candidate, then that part will buy out the realists. When that has happened the new owners will reshape the company into the growth-or-die-trying experiment they where expecting to buy.

I never understood the mania for growth. If a company is reliably returning, say, 20% profit, I wouldn't mess with success.

The world isn't static, a "reliable" profit is worth less and less each year if a company isn't growing. Companies are valued based on their future earnings potential, growing companies will thus be valued much more highly. In Yahoo's case not only was there no growth, but their business was shrinking without a clear path to stopping that.

OK, but unless that company is paying out a dividend, why would you invest in it?

Theoretically, a stock price reflects future earnings. If future earnings are constant, then the stock price doesn't move.

Why buy $1M in stock if you know 5 years from now it'll be worth $1M?

Because you know 5 years from now it will be worth $1m, and not a lot less after a series of growth-oriented misadventures that didn't pay off.

Also, you'll be getting steady income from dividends.

Also, in the bigger picture you're less likely to be dealing with a manic depressive cyclical market that gyrates wildly between extreme growth mania and extended depressive episodes.

What you don't get is a monkey-brain dopamine kick from telling yourself that you're an awesome person who beat the market.

It makes investing predictable and drama-free, and where's the entertainment in that?

People have thousands of stocks to choose from. If they want consistent low growth, they'll go with something far more predictable like a bond. Low demand for this stock makes it worth even less, which hurts investors even more and gets CEOs fired. This is why growth or consistent high profits that can pay for dividends is a goal of every company. Mediocre profits alone won't really do you much good if you're working for your investors at a major corp.

But in turn, if a company is getting 20% profit, why do they need people to invest?

Because they're currently a public company, and without people interested in buying the stock, it's going to attract activist investors which often ends up as a big distraction without making any real changes.

So it sounds like the problem is systemic - this is why I'm never eager about companies going IPO...for every Google that ensures shareholders can't kill the company, there are hundreds that guarantee mid-term failure for short-term gain.

Equity cash out

> OK, but unless that company is paying out a dividend, why would you invest in it?

I feel that's the core problem with the stock market. It was supposed to be about investing in a company in exchange for the share of the profits (dividents). Instead, people got greedy and now it's gambling; nobody cares about the company they invest in, everyone plays meta-games.

The stock market has always had a high gambling component.

A lack of dividends is hardly the stock market's problem, though. Assuming that is actually a problem (I'm not sure it is), it would be a problem of company managers and investors not understanding fundamentals.

A company usually needs to be growing YOY in order to reliably return a 20% profit. Unless it's a protected monopolist, or a comfortably ensconced player in a stagnant market. (In which case it's ripe for competition.)

It is entirely possible to overprioritize growth. Doing so can lead to overreach, spiraling costs, bloat, and loss of focus. But at least some growth is often required just to maintain a stable return.

It also bears mentioning that ther are many possible factors driving growth, some of them endogenous and some of them exogenous, some of them cyclical and some of them secular. It's very hard to speak of the blanket term "growth" as being particularly meaningful, in and of itself. We need to be specific.

If you think the company will keep returning that profit, no more, no less, and it happens to be true, then you will most likely find market participants who are convinced that the company will return more than that in the future. Since their projection of future returns is much higher than yours, they will offer you enough to sell. The new owners won't be content with with the stable return because that's not what they paid big money for.

Dividends are taxed at a higher rate than capital gains.

Once you look at the incentive structures that creates, the mania becomes disappointingly rational on the part of investors.

It also converts investing into a negative-sum game.

That leads back to the dividend question. As a shareholder, you only make money one of two ways: your stock goes up, or you get dividends. To be attractive, a company needs to be doing one or the other.

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