Yes, Virginia, You CAN Have Great Stock Performance While Also Investing Heavily And Not 'Maximizing Profit'

Yesterday, I described one of the big reasons America’s economy is so crappy:

The people who control and run America’s big corporations have gotten so greedy that they’re taking an unprecedented percentage of the country’s wealth and income for themselves.

America’s big corporations have the highest profit margins and profits in history. But instead of taking some of these extraordinary profits and investing them in their people and the future, the corporations are paying their senior managers more and/or hoarding cash or giving it to investors.

This greed on the part of a small percentage of Americans, unfortunately, is crippling the U.S. economy and clobbering all other Americans.


Because the cash that America’s senior managers and investors are taking for themselves might otherwise become revenue for other companies and, thus, help the overall economy grow faster. One company’s wages and investments, after all, soon become other companies’ revenues (when employees spend it).

Corporate profits as a per cent of GDPAmerican companies have the highest profit margins in history.

If American companies were making only average profits, or were sharing an average amount of their wealth with the folks who generate it (employees), we wouldn’t be having this conversation. But the companies aren’t doing this. As the accompanying charts show, American companies are 1) making the highest profits in history and 2) paying the lowest wages in history. Investors and senior managers, meanwhile, are 3) running off with the highest percentage of America’s income in history.

When you point this out to folks who are benefitting from this trend–senior managers and investors–they often react with outrage.

Profits as a per cent of GDPAmerican companies are paying the lowest wages in history.

First, they call you a “socialist,” even though the government has nothing to do with this.

 Corporate and investor greed is a private-sector problem, not a government problem. The government could do something about it, but let’s hope it doesn’t come to that. Let’s hope, instead, that America’s senior managers and investors finally realise that they are just being greedy and decide to share more of the value their companies create with the people who create it.Next, senior managers and investors claim that one tenet of capitalism is that employees are just “costs” and should be paid as little as possible (except for senior management employees.) This, of course, is bunk. There is no “law” of capitalism that employees should be paid as little as possible, that a handful of winners should share as little as possible the folks who actually do the work. When a wildly profitable corporation such as McDonald’s or Walmart decides to pay its employees so little that they must live in poverty, this is a choice, not a law. But you can understand why senior managers and investors like to pretend that it is a law. Because then they won’t be held responsible for choosing to skim off most of the country’s wealth while shafting everyone else.

labour share of incomeThe share of national income going to the people who do the work (‘labour’) is at the lowest level in history. Investors and senior managers, meanwhile, have never had it better.

Lastly, senior managers and investors scream that, if American companies shared more of their profit with their employees, their stocks might drop!

That this point is made with the aim of ending the conversation–that it would obviously be unthinkable for any corporation to ever do anything that might make its stock drop–tells you a lot about how deeply investor greed has become an accepted part of our culture. Great companies, of course, create many different kinds of “value,” of which cash flow and stock performance are only two (Great companies create great products, for example. And they create excellent jobs that pay a living wage. Both are very valuable.) And the truth is that companies can have very high stock prices even when they don’t scrimp on investing, obsess about “maximizing profits,” and dance to Wall Street’s every whim and desire.How do we know that companies can create excellent financial returns for shareholders without “maximizing quarterly profits?”

We can just look at the stock performance of one of the best companies in the world, Amazon.

From the moment Amazon was founded more than 15 years ago, Amazon’s management has chosen to invest aggressively in the long-term future, instead of fretting about maximizing quarterly profits. As the chart below shows, for more than 15 years, this decision has reduced, deferred, and even eliminated near-term profits. And yet, over the past 15 years, Amazon’s stock has delivered extraordinary returns.

amazon COTD
Amazon stock

Why does Amazon’s stock keep hitting new highs while the company (as critics love to point out) continues to generate almost no profit?

Because Amazon’s management has stated very clearly that the company is going to invest aggressively in the long-term future instead of worrying about near-term profits. And Amazon’s management has demonstrated, again and again, that it can make smart-enough investments that, over the long haul, the investments can produce even greater returns.  

Importantly, investors who are smart enough to understand that intelligent investing today can produce even bigger profits tomorrow want Amazon to continue to invest this way. Amazon’s investments, the investors understand, stand a good chance of being worth much more in the future than they would get from a ever-growing pile of cash earning nothing in the bank. 

So don’t let anyone tell you that American companies have to “maximise quarterly profits” or else their stocks will drop. It just isn’t true.

SEE ALSO: This One Tweet Shows What’s Wrong With American Business
Disclosure: Jeff Bezos is an investor in Business Insider through his personal investment company Bezos Expeditions.

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