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> The stock market's quarterly focus

This idea constantly resurfaces. It's easily shown to be incorrect. If it was true,

1. companies would have low P/E ratios

2. companies that "eat their seed corn" to sacrifice the long term for short term gain would see their stocks dump after quarterly results come it. This is not happening.

3. you could get rich by shorting those short term companies, making money off of the fools that bid up share prices for short term profits. This is not happening.

4. A successful stock investment strategy is buy and hold, hold, hold, hold.

5. AMZN

All that is assuming investors don't know what's happening. Stock price only changes in response to quarterly results if the quarterly results are different from expectations.

The real problem is that if you have a company which is losing money for several years, their leadership will generally be fired, even if they're losing $100M/year for an annual 5% chance of making $20B.

AMZN is famous for losing money for a decade, yet having constantly escalating stock valuations.

I don't think investors are fools. The alleged short term focus of investors and companies requires them to be fools (as a group). Also, the continued growth for decades of corporations simply doesn't fit with being short term focused.

Boeing.

Heh, you've picked the one counter-example that I was going to toss in there, but didn't. Amazon built its cloud business during the lean times after the dotcom bust, when there wasn't a ton of money chasing risk in the tech sector. So they were able to focus on the long-term and on building an entirely new kind of business.

They could do it because they had the resources thanks to their core business and, more importantly, they could retain the engineering talent in a world where rockstars couldn't just quit and raise VC megabucks to pursue "Uber for Cats" or some adtech play.

So it has turned out that AMZN is an anomaly, judged by its P/E ratio as you point out, in that investors will let it bleed for a long time and still value it highly.

There are a few companies like that, that can afford to fail and that the market will have patience on a fairly long time horizon. In those places you can get a little taste of what it was like to work at a government-funded blue-sky research lab with no pressure to productize in a commercial timeframe.

Boeing regularly does bet-the-company projects with 10-15 year time to break-even. Tesla's another. The whole biotech industry.

If you've got a convincing case, investors are happy to invest in long term projects.

AMZN isn't really losing money, they're just reinvesting it rather than paying it as dividends. Their stock price goes up because they're consistently converting cash into business value worth more than that amount of cash. But they're mostly not making long-term plays, they're making good short and medium-term plays.

And Boeing isn't high-risk. It's high-cost low-risk. Aircraft are very expensive but also well understood.

> The alleged short term focus of investors and companies requires them to be fools (as a group).

The consequence is a result of structural failure, not individual failure. We put abstraction layers between investors and their investments. John has a 401K, he invests it in a mutual fund, the fund invests it in corporations, the corporations invest it in business units, the business units invest it in research. At every layer of abstraction, the level above doesn't want to spend resources understanding the details of the bottom tier, they just want to see numbers that are higher this quarter than last quarter. Because John doesn't have time for that and if he is only looking at quarterly results then the mutual fund manager's incentive is to produce quarterly results, which flows all the way down to the bottom.

The only solution is for investors to know what they're investing in, which requires more smaller corporations and fewer layers of abstraction.

In a sense it's basically the case that wide diversification is free-riding on the analysis done by the other investors in the same stocks, but the more people who do it the less efficient the market becomes because there is less thought going into where money is invested.

> It's high-cost low-risk.

The history of the airframe industry is filled with huge bankruptcies. It's a very volatile, high risk business.

> they're just reinvesting it

And that's exactly what the proponents of the short-term profit theory complain that businesses are not doing.

> The history of the airframe industry is filled with huge bankruptcies. It's a very volatile, high risk business.

Not at the scale of Boeing. They can survive a failed project, and a failed project is very expensive but most Boeing projects don't fail.

The hard part about long-term research is that most foundational research projects do fail to commercialize and you have to stick it out until you get the one success that makes up for all the failures.

> And that's exactly what the proponents of the short-term profit theory complain that businesses are not doing.

They complain that businesses are not investing enough in long-term research, which is what they are not doing.

> Not at the scale of Boeing.

Yes, at the scale of Boeing. I am familiar with the industry, and it is anything but "safe". Boeing took an incredible risk with the 747. And if Boeing screws up today, Airbus will have them for breakfast.

> if you and about 20 hotshot engineers could clone the product in a year, then it's not innovation

I think this statement runs against the argument these OP is trying to make. It's the massive number of failures that occur on the way to finding the innovation that important but don't show up when duplicating the end product. It's not hard to make a lightbulb if you have a good vacuum pump and know what filament to use, but trying thousands of different metals while inventing new vacuum techniques is expensive and hard.

(I appreciate your core argument, I just think this particular statement runs against it)

I don't think it does, though. "Innovation" isn't solely a function of the number of failed attempts, despite the fact that this particular way of looking at it has become trendy of late. Take a look at that last link, and specifically at how I unpack the lightbulb analogy that you used above and that's so popular with the "fast failure" set:

https://collectiveidea.com/blog/archives/2015/09/24/the-righ...

"Yeah, I know, I’m a jerk, because a startup is the hardest and most punishing thing you can do, and it’s considered rude to suggest that anyone’s success at it is largely attributable to luck and not “innovation”. And I’m sure you’re also thinking of Thomas Edison, and how he famously tried 1,000 different filaments before inventing the light bulb and then boom, innovation! Isn’t Airbnb just like that? No, it isn’t, because that story is bunk.

As Thomas Parke Hughes describes in his magisterial Networks of Power: Electrification in Western Society, 1880-1930, Edison and his team at Menlo Park built an entire, low-cost electrical distribution network, of which the light bulb was one of a number of critical new components. It wasn’t like the electrical grid was just sitting there with empty sockets, waiting for Edison to diddle his way through the solution space until he stumbled into just the right filament so that he could staff up and scale; he had to invent, finance, manufacture, and deploy the entire grid in order to take on the entrenched gaslight industry."

I'm not disputing your thesis about the need for basic research and long term investment ( and definitely alot of what's on HN is hype), but could it be that in today's world, deep innovation can be done in a more distributed manner and small research groups are much more powerful , especially since we already have a lot of the needed infrastructure ?

AT&T was founded in the 1870s. But it wasn't until 1925 the research activities had gotten so massive that they spun it out in Bell Labs.

Apple and Microsoft are around 40 years old, but Amazon and Google are much younger companies and Facebook is not even a teenager yet (although it's no longer run by one).

Give these companies a few more years to build equally impressive research wings :-)

So we should be anticipating the breakup of those monopolies somewhere around 2076?

We could keep subsidizing these companies by giving up our privacy while they build up said research wings, or we could just spend it on research wings that are already decades old (you know, the unis that made those companies possible).

You're right, they do produce useful stuff, but it's a really inefficient way of doing it.

If free enterprise does not produce innovation, or is inefficient at it, then unfree economies should be fountains of innovation. I haven't noticed any such coming from such economies.

The argument isn't black and white. We're a "free economy" but we still control and regulate certain things in the market. The argument is that this is a specific instance where our "free economy" is failing and so we should use government to address that. It bears no comparison to "unfree economies."

I just don't think that's going to happen. Bell Labs was never profitable, was it? Look at Xerox PARC--all the stuff they invented there that Xerox never profited from, although many others did. It's just not in company DNA anymore. They would rather buy out startups.

I have a different theory. You need access to users/customers of problems you're trying to solve. I guess the first couple of rounds of tech boom happened in the valley because of the access to chip makers, early internet adopters etc.

What this probably means is just that valley doesn't matter anymore to every industry/market. Probably also explains why we're starting to see more international startups at YC.

A lot of people can clone a TCP/IP alike stack + a router by themselves in less than a year. Assuming one only needs to clone the product function, "route packets over a network", not all the concrete implementation details. The daunting part is being compatible with all the written sometimes unwritten, corner cases of the actual TCP/IP spec.

By the proposed measure, the Internet is not innovation.

"Things that speak IP" is the definition of the internet.

So...I don't get your argument.

Why does the argument that "the government should spend more on basic R&D" need to be packaged with "no-one outside of academica ever does anything innovative"?

Most people in tech wholeheartedly agree with the former and disagree with the latter.

You don't need to be in academia, but you do need to create a working environment that shares some of the same features. Very few companies do this well; most don't do it at all. Which isn't to say it's impossible to innovate in industry - but typically it is actively made much more difficult.

It's undoubtedly true that "innovation" is a term that is much abused in industry, weakened to the point it is mostly meaningless.

Not what I said. I realize that it's asking a lot to click through to the underlying links (said without irony, since I rarely do that myself anymore :), but I'm talking just as much about the massive network of labs that was funded by tax dollars in the cold war, only a portion of which were in universities.

I was in academia for years. I didn't see all that much innovation coming out of there, either. Too much politics and rent-seeking (gotta get that next grant) and you have to publish, and there's committees and conferences. And then whenever we did invent something cool, the university patent office wouldn't take it and do anything with it! I should have 2-3 patents now and instead I have none. Not that I'm a fan of patents, anyways, but it was the late 90s and my adviser and I were breaking new ground at the time.

I think the paradigm shift is that companies like Google are doing research (e.g. security and algorithms) at a quality level that only existed in academia. IBM has a long history on basic research but they are not capable to move those inventions to the real world except in press releases.