Friday, January 30, 2009

Expectations of Future Value Must End

People wonder how we got ourselves into the economic mess we're in today. I am not a trained economist, but even if I was, I don't know if I'd have anymore answers. That said, I'm never short on theories, and my current theory is we've become too enamored with the concept of investing in the future value versus investing in profitability.

The slowdown of 2000 was an indicator of what would come, but we all ignored it in favor of betting on economic growth and maximizing our investment. However, the culture of future value was nothing more than a well-disguised lottery system in which some people won big, but most people just lost their investments.

What's even more ironic is that the masses are still looking for that next "growth sector" to chase the almighty dream of becoming millionaires overnight. Wake up people, betting on future value is no better than betting on craps at a Vegas casino. We're potentially looking at a decade of minimal economic growth, which shouldn't be confused with a decade of no profits.

Indeed, we need to return to a mindset of investing in profitability and companies need to start sharing its profits with its investors again. There's nothing wrong with same dollar sales (taking into account inflation or perhaps even deflation) year over year as long as a company is profitable. Moreover, by sharing those profits with investors and employees, everyone wins.

Instead, we have a market that is best described as a group of wealthy people waiting until the table gets "hot" before they'll lay their money down. If you've ever spent any time in a casino, you've seen this phenomena. Small numbers of real gamblers at every table and a bunch of people moving between tables. Then, a table gets real hot and there's a swarm of people around it and every spot is occupied with lots of loot on the table.

There's considerable similarities between the casino and the economic markets as they are both reliant upon each investor's psychological state and the psychological state of a group of investors. As we've seen this connection is dangerous and faulty. Economic markets need to be managed by reason, not emotions. There will always be the potential for loss, but if you believe in what the products and services that a company provides, chances are so do others. And, as long as that company is reasonably well-run, it should be able to take the investors money, use it to build infrastructure, which in turn should generate profit that all can share in.

Money does make the world go 'round! And until we get some flowing through the system again, many will continue to hurt.

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