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Comment by aetherson | Hacker News Reader

Cool. Go buy Walmart stock.

Seriously, guys, all this "Oh, well, I disagree with the valuation of this company" stuff isn't very interesting. We all know that sometimes the market gets the value of companies wrong. Probably if Amazon's next quarter is not very good, its valuation will go back down.

And trying to make a virtue of extremely simple analyses of company valuation is also silly. It's not like you're revealing a deeply held secret that Amazon is very low-margin and often runs a loss. It's not like people don't get that. They've decided that Amazon has other virtues. Maybe they're right and maybe they're wrong, but I'm really confident that looking only at net profit as your sole method of valuation is a losing stock market strategy.

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> I'm really confident that looking only at net profit as your sole method of valuation is a losing stock market strategy.

I'm not sure investing only in highly profitable companies would result in a "losing stock market strategy" (assuming "losing" means underperforming the S&P 500). Just looking at the ten most profitable[1] eight of them (all but Chevron and Walmart) are among the most weighted in the S&P 500 (in fact they're the top eight), Apple alone makes up 3.84% of the index. Combined these eight seem to account for about 15% of the index[2][3].

That's only looking at eight highly profitable companies in an index of 500 and it's 15% of the index! I can't imagine a portfolio of the 20 or 30 most profitable underperforming the index considering they would make up such a large part of the index itself. [Though it would be interesting to see historically what the performance would be of such a portfolio].

[1] http://fortune.com/2015/06/11/fortune-500-most-profitable-co...

[2] http://portfolios.morningstar.com/fund/holdings?t=SPY (this is actually looking at the ETF but it's presented better then [3], which is provided to show they don't differ much)

[3] http://slickcharts.com/sp500

I think the argument is that high profitability will increase demand for a stock to the point of it being overvalued.

Replace "profitability" with "growth" and you get the dual problem.

My argument, at least, is that profitability is good for a company and a stock, but isn't the only thing that's good for a company and a stock.

Which, honestly, everyone already knows.

Here are the 10 most profitable companies (also according to F500 (http://money.cnn.com/2006/04/03/news/companies/mostprofitabl...) of 2005:

1. Exxon Mobil (2005 price: 61.05, 2015 price: 79.95)

2. Wal-Mart (2005 price: 51.60, 2015 price: 71.58)

3. GM (Went into bankruptcy, I don't really understand what happened to its stockholders, which thank god I was not)

4. Chevron (2005: 61.71, 2015 price: 90.62)

5. Ford (2005: 12.40, 2015: 14.39)

6. ConocoPhillips (2005: 42.38, 2015: 52.08)

7. GE (2005: 36.12, 2015: 25.76)

8. Citigroup (2005: 497.80, 2015: 58.72)

9. AIG (2005: 1317.20, 2015: 63.64)

10. IBM (2005: 94.10, 2015: 159.76)

S&P500: 2005: 1191.17, 2015: 2079.65

AIG :O

That's not "a portfolio of the 20 or 30 most profitable" companies vs the S&P 500. That's a portfolio of ten companies that were at one time the most profitable and then not regularly adjusted compared to an index that was updated regularly (only 312 companies in the index in 2005 were still in it in 2015[1]).

A realistic portfolio to prove/disprove your theory that investing in highly profitable companies is a losing strategy would be to take the 25 most profitable companies (I said 20 or 30 so let's just go with the middle) and update it every year.

With only the eight most profitable making up ~15% of the weight a portfolio of 25 is probably going to approach 30%. It's hard to imagine the largest components representing nearly a third of the index weight are going to move completely and drastically divergent to the index as a whole.

[1] http://marketcapitalizations.com/changes-in-sp-500-component...

The Citigroup comparison isn't correct (they were not worth $1.5+ trillion in 2005).

Today their market cap is $176 billion, in 2005 it averaged around $230 billion or so.

Sure, but first you go put all your wealth into AMZN for the next ten years and don't touch it. Think you're any better off from Walmart over that time frame? Valuations are fickle at best. At some point, money needs to be made.

For a 25-30 year time frame AMZN will beat S&P and Walmart by several X. AMZN, GOOG are companies which will have a huge impact on how we live. I have put some money into them. They are Berkshire Hathaways of our time.

After Lehman, I learned not to say such things.

25-30 years is too long to predict anything when it comes to tech. The Chinese already have their versions of Google and Amazon...and just like the Japanese automakers in the 70's there is nothing to suggest they can't displace either Amazon or Google.

Also what happens tomorrow if you don't have to go anywhere to buy most products, but just fabricate it at home or at the local fab down the road as Neil Gershenfeld predicts.

Financial analysts have been harping at Bezos for the need to make profits or see his valuation tumble since 1998-1999, when he invested an obscene amount of money in expanding his infrastructure.

That's more than 15 years. So far he has been proving them wrong.

That is not a good argument. The market can remain insane longer than any one of us can stay solvent.

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