the stock price thing at least seems like Goodhart's law. Stock price is supposed to be a measure of investors' confidence in whether a company will make money, because (common, non-voting) stock is nothing more than entitlement to a share of the profits. How much will you pay me today for a tiny slice of the pie periodically over the lifetime of the company? The problem w this is twofold:
1) You can sell stock after you buy it, which isn't itself a problem but introduces a confounding variable. Now stock price is a reflection partly of investors' confidence that the company will make money, and partly of investors' confidence that the stock price will go up. These two obviously feed back into one another: if a company announces things that make it seem profitable the stock price will go up, which can drive another round of investing beyond what the announcement warrants just hoping that they can ride the wave upward and get off at the peak. I personally did this with dogecoin when it went on its bull run a few years back. Despite my wholehearted belief that DOGE was basically worthless, I saw the price going up so I threw some money at it with the intention of bailing as soon as I saw any substantial growth. I tripled my money in three days and greater fool'd my way out of that position.
2) The tail starts to wag the dog. The perceived health of the company should make stock prices go up, but the stock price going up ends up influencing the perceived health of the company. What other measure do we have? The answer of course is "several, but none as easily summarized and delivered as a single number that has either increased or decreased since yesterday".
wilkommen · 22m ago
Another related truth is:
3) The stock of most companies actually doesn't entitle you to a share of the profits, because they either don't pay a dividend (very common), or if they do pay a dividend, the size of the dividend that the stock pays has no fixed relationship with the profitability of the company.
So if the stock doesn't entitle you to a meaningful voice in the company's affairs (which common stock doesn't), and it also doesn't entitle you to a share of the profits, then from the perspective of the stockholder, there is no way to calculate its value on fundamentals alone, because there are no fundamentals! Common stock is a digital piece of paper no more intrinsically valuable than a rare baseball card. So in the current environment, with stocks being what they are, the value of all stocks are calculated based solely on people's expectations of what others will pay for them.
lotsofpulp · 1h ago
3) company publishes their 10-Q and 10-K with terrible results and the gamblers try to rush out as they watch themselves be the greater fools.
Trustworthy, transparent financials mitigate the above 2 “problems”. Trustworthy and transparent being key requirements, which can only be satisfied if with a trustworthy and transparent auditor (i.e. government).
Edit: Also, the author's quote here
>This is what Deming meant when he said “nobody gives a hoot about profits”.
does not make sense to me, considering the large gains (to the tune of trillions of dollars) are to the shareholders that own shares in businesses with enormous profits. Obviously, someone (everyone?) gives a hoot about profits. Those obviously translate directly to money in one's pocket, especially those of managers and executives getting paid in equity.
ratelimitsteve · 38m ago
edit: sorry about that, I thought I couldn't reply for a bit.
What he means when he says "nobody gives a hoot about profits" is that "They only care about...personal success", in a system where stock price is seen as a measure of corporate health and success but itself can be driven by things other than good corporate health. One can achieve personal success by guiding the company effectively and making it healthy, but that's not the only way. Another way is by hopping on the AI train, because that's what's hype right now. That will communicate to investors that you're well-positioned to take advantage of the latest and greatest thing, regardless of whether you actually are.
To turn it into a metaphor because I just had my second espresso of the day and that's what I feel like doing, imagine a chef you pay on a per-meal basis, but you have to pay him during the cooking process. For argument's sake lets say the meal takes 6 months to deliver, and the chef himself has to eat food and sleep indoors in the meantime. You only want to pay for a quality meal, and the final judgment in quality can't take place until the meal is fully complete and served. So you look for lead indicators, and you happen upon two: smell, and whether the chef is using the latest and greatest techniques. These two things are pretty strongly correlated with good, high quality meals and for the most part people who pay for good smells and good techniques end up getting good meals. But I, as the chef, can exploit this gap between what you want and what you look for. Imagine castoreum is the latest and greatest technique, beaver anal gland extract. I can deliver a meal that smells great, uses castoreum and tastes amazing, or I can spend your money for six months then deliver boiled beaver buttholes in scented paraffin wax. The meal is a product, I'm the CEO, and the boiled beaver buttholes is AI. I can exploit the market's expectation that this tech will make everything better by shoehorning it in places it won't fit or half-assedly delivering a product whose primary source of anticipated value is just the fact that it uses AI, and by the time people realize that it hasn't actually delivered the promised product I've collected salary for 6 months and now I get to write myself a golden parachute check on the way out the door. Thus, the company's profits are completely divorced from my own profits as CEO, I hit all the KPIs, did exactly what investors asked me to do, the stock price went through the roof and we've created nothing at all of intrinsic or exchange value.
jackero · 2h ago
Maximizing productivity comes from maximizing efficiency. Efficiency is about sitting down and analyzing your tasks holistically and doing min-maxing to ensure every process achieves its greatest result.
Now ask yourself this: how often do people do this at all? Pretty much never. Most of us only do it when you have to, because you aren’t making enough money, because your application is slow, because you can barely meet budget, or because you are trying to land on the moon and failing costs too much.
jgeada · 1h ago
The other hard lesson learned during the Covid shutdowns (actually, it is learned and promptly forgotten at every major crisis):
maximizing efficiency also maximizes the number of single points of failure in your system. Anything that goes wrong breaks an optimized for efficiency system.
You need to have resilience and redundancy to deal with variability, but those cost money.
Much better from the management perspective to ignore those risks, cash in on the cheap profits and blame "unexpected events" and get a bailout when things go wrong. They cash in on the easy money and have no downside consequences.
1) You can sell stock after you buy it, which isn't itself a problem but introduces a confounding variable. Now stock price is a reflection partly of investors' confidence that the company will make money, and partly of investors' confidence that the stock price will go up. These two obviously feed back into one another: if a company announces things that make it seem profitable the stock price will go up, which can drive another round of investing beyond what the announcement warrants just hoping that they can ride the wave upward and get off at the peak. I personally did this with dogecoin when it went on its bull run a few years back. Despite my wholehearted belief that DOGE was basically worthless, I saw the price going up so I threw some money at it with the intention of bailing as soon as I saw any substantial growth. I tripled my money in three days and greater fool'd my way out of that position.
2) The tail starts to wag the dog. The perceived health of the company should make stock prices go up, but the stock price going up ends up influencing the perceived health of the company. What other measure do we have? The answer of course is "several, but none as easily summarized and delivered as a single number that has either increased or decreased since yesterday".
3) The stock of most companies actually doesn't entitle you to a share of the profits, because they either don't pay a dividend (very common), or if they do pay a dividend, the size of the dividend that the stock pays has no fixed relationship with the profitability of the company.
So if the stock doesn't entitle you to a meaningful voice in the company's affairs (which common stock doesn't), and it also doesn't entitle you to a share of the profits, then from the perspective of the stockholder, there is no way to calculate its value on fundamentals alone, because there are no fundamentals! Common stock is a digital piece of paper no more intrinsically valuable than a rare baseball card. So in the current environment, with stocks being what they are, the value of all stocks are calculated based solely on people's expectations of what others will pay for them.
Trustworthy, transparent financials mitigate the above 2 “problems”. Trustworthy and transparent being key requirements, which can only be satisfied if with a trustworthy and transparent auditor (i.e. government).
Edit: Also, the author's quote here
>This is what Deming meant when he said “nobody gives a hoot about profits”.
does not make sense to me, considering the large gains (to the tune of trillions of dollars) are to the shareholders that own shares in businesses with enormous profits. Obviously, someone (everyone?) gives a hoot about profits. Those obviously translate directly to money in one's pocket, especially those of managers and executives getting paid in equity.
What he means when he says "nobody gives a hoot about profits" is that "They only care about...personal success", in a system where stock price is seen as a measure of corporate health and success but itself can be driven by things other than good corporate health. One can achieve personal success by guiding the company effectively and making it healthy, but that's not the only way. Another way is by hopping on the AI train, because that's what's hype right now. That will communicate to investors that you're well-positioned to take advantage of the latest and greatest thing, regardless of whether you actually are.
To turn it into a metaphor because I just had my second espresso of the day and that's what I feel like doing, imagine a chef you pay on a per-meal basis, but you have to pay him during the cooking process. For argument's sake lets say the meal takes 6 months to deliver, and the chef himself has to eat food and sleep indoors in the meantime. You only want to pay for a quality meal, and the final judgment in quality can't take place until the meal is fully complete and served. So you look for lead indicators, and you happen upon two: smell, and whether the chef is using the latest and greatest techniques. These two things are pretty strongly correlated with good, high quality meals and for the most part people who pay for good smells and good techniques end up getting good meals. But I, as the chef, can exploit this gap between what you want and what you look for. Imagine castoreum is the latest and greatest technique, beaver anal gland extract. I can deliver a meal that smells great, uses castoreum and tastes amazing, or I can spend your money for six months then deliver boiled beaver buttholes in scented paraffin wax. The meal is a product, I'm the CEO, and the boiled beaver buttholes is AI. I can exploit the market's expectation that this tech will make everything better by shoehorning it in places it won't fit or half-assedly delivering a product whose primary source of anticipated value is just the fact that it uses AI, and by the time people realize that it hasn't actually delivered the promised product I've collected salary for 6 months and now I get to write myself a golden parachute check on the way out the door. Thus, the company's profits are completely divorced from my own profits as CEO, I hit all the KPIs, did exactly what investors asked me to do, the stock price went through the roof and we've created nothing at all of intrinsic or exchange value.
Now ask yourself this: how often do people do this at all? Pretty much never. Most of us only do it when you have to, because you aren’t making enough money, because your application is slow, because you can barely meet budget, or because you are trying to land on the moon and failing costs too much.
maximizing efficiency also maximizes the number of single points of failure in your system. Anything that goes wrong breaks an optimized for efficiency system.
You need to have resilience and redundancy to deal with variability, but those cost money.
Much better from the management perspective to ignore those risks, cash in on the cheap profits and blame "unexpected events" and get a bailout when things go wrong. They cash in on the easy money and have no downside consequences.