Sunday, October 26, 2014

Random thoughts on public companies

Some time ago when I didn't understand Market economics and how public companies worked, I used to believe that if you have a lot of money you are inevitably going to make much more (money attracts money).

I would imagine that worst cast you can just get a lot of interest on that money. Now I see the problems with that thinking.

The companies like Google, Facebook, Amazon, Apple etc. have lots of money through public investments in their stocks, but that money isn't very hard to "keep" or "increase" as the investors are very quick to punish you if they don't see growth of your company (their money). 

Turns out just growing doesn't help you have to "beat" expectations which are usually pretty optimistic too. This becomes an issue. These kind of growth expectations usually require companies to either have found a business that is bound to keep growing like Ads or Enterprise or Hardware (with enough efforts for sure) Or keep coming up with new ideas.

The new ideas part is tricky and is basically a big bet. Reading a book on AIG's demise I learned how they came up with certain ideas that basically caused them to go bankrupt when markets crashed in 2007. Tech companies don't usually do something as risky but nonetheless any business is a risk.

So thats the thing, even if you have money you can just sit on it with interest seeking activities, you gotta find ways to grow the money faster than other alternatives which people could instead choice to do with their money themselves. 

Just being a big company with lots of money (through public investments) isn't enough, which also bring another observation previous performance isn't an indication of future.