why are shareholders expected return to investment every time when money isn’t infinite and infinite growth isn’t possible

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Like you can’t expect everything to be a success and money isn’t infinite. Infinite growth can’t exist, especially for all shareholders around the world. And yet they expect full return on their investment whereas companies should focus on their clients who buy their products and employees who want to help the company and be rewarded but yet the bosses only seen to focus on making shareholders happy. There seems to have been a shift in this mindset somehow over the decades.

It’s naive on my part and it’s more complicated than what I wrote, but I’m curious and I would like to understand. Thank you for your help!

In: Economics

13 Answers

Anonymous 0 Comments

Making profit for shareholders is the *purpose* of a business corporation, but investors know that it doesn’t always work out. That’s not a reason for the management to stop trying, though, especially since they will lose their jobs if the business closes.

Economically it’s not necessarily true that infinite growth can’t exist, especially not in a sense that’s relevant to business decisions. There’s a limited amount of natural resources accessible to us with present technology, but businesses can grow more profitable without necessarily using more resources. For example, their processes could become more efficient, or they might sell mostly intangible things. If you think of a product like a movie, for instance, it costs something to produce it but a very high-grossing film doesn’t necessarily cost more than an average film.

Anonymous 0 Comments

You assumptions are not correct. Investors don’t expect infinite growth. They don’t even always expect “full return on their investments”.

More typically, an investor might split their investment into different assets. Maybe some parts in real estate, some parts in high growth tech companies, some parts in precious metals like gold, some parts in cash, some parts in government bonds, or even in crypto currencies.

For each investment part, they are weighing the *probability* of making a profit vs. the *risk* of losing some money.

Put it another way, they expect to win some and lose some — but they try to have a good mix of investments such that *over the long term* they might eek out more wins than losses.

Venture capital investors may be an extreme example of this. They fully expect maybe 90% of their investments would fail / lose money. Not only zero profits, but potentially losing their investments completely. However they also hope that the remaining 10% of their investments might win big, making up for the losses.

Investments are not static. Today I might invest in Apple. Tomorrow I might pull my investments from Apple (because I don’t think they’ll continue to make profit) and maybe put the money to Walmart instead.

So it’s not true that investors expect particular companies to always make money. In fact, sometimes investors might fear that the majority companies will start losing money, and they might shift large parts of their investments out from companies and into safer instruments like government bonds.

Anonymous 0 Comments

If you took your extrapolation to another arena, why do people compete in the Olympics. Clearly only one person can win a gold medal. So why would 100 people compete in an event? It is completely meaningless by your reasoning.

Few companies survive in the long term. In every industry, there will be winners and losers. No one knows who wins and who loses but every company is expected to do their best. Investors know this. They don’t expect infinite growth but growth can come from taking market share or reducing costs or better economies of scale or better technology. And there is reward for this no matter that it cannot be extrapolated indefinitely.

Anonymous 0 Comments

Thanks for your explanations, everyone. I understand this more clearly now!

Anonymous 0 Comments

Infinite growth can’t exist; but I don’t see any reason to think we are anywhere but the slow initial phase of the logistic curve; our economy has barely begun to expand to its true potential. We haven’t even mined an asteroid yet or built a real orbital or lunar colony yet. We have cut extreme poverty in half in the last 20 years… great…. we have a LONG way to go in developing the rest of the world, much less the solar system.

In my lifetime we have advanced further than we did since agriculture was invented, and its only started.

Anonymous 0 Comments

This is a very, very confused question. Growth and money don’t have to be infinite for me to expect a 10% return on my investment from now until the end of time.

First off, profit does not require growth. The fact that we think of economic growth as “normal” is a product of the fact that we live in a time were growing populations, new technologies, and capital accumulation have led to very, very fast economic growth by historical standards. Obviously, this provides opportunities for profit, and people want to take advantage of them.

But profit doesn’t *require* this. A business that spends $100,000,000 a year and takes in $110,000,000 in revenue is profitable, even if it never grows. A store owner can keep buying goods for $100 and selling them for $200, day in and day out, year after year, without buying a bigger store. A landlord can buy a house and keep charging rent on it as long as people want to live there without the value of the house increasing.

A corporation that makes $10,000,000 in profit this year can use that money to try to expand operations, but sometimes they just mail it out to their shareholders. That’s what *dividends* are.

Second, the overall economy does not need to grow in order for me to expect my personal investments to grow. The reason people invest their money is that, at some point, they want to take their profits and spend them. Very typically, this involves spending 40-50 years working and investing their savings, and then 10-20 years living off of those savings and the profits they earned. At that point, their personal investments will be shrinking, while younger workers will begin saving and will expect their personal investments to grow.

Third, growth does not need to be infinite in order to be sustainable over any particular time period that we actually care about. We have every good reason to think that we can continue to grow over the next 100 years. Technology is still improving and we still have a lot of opportunities to make ourselves more productive by accumulating more capital goods. As long as the world governments can not start WW3, we shouldn’t be anywhere near our peak yet. The fact that economic growth might cap out in 2512 isn’t going to stop people from expecting economic growth in 2024.

Fourth, the idea that companies should “focus on their clients” instead of shareholders is fundamentally confused. Companies make money by providing services that their clients are willing to pay money for. A company that isn’t doing that isn’t going to stay profitable and isn’t going to make its shareholders happy. That doesn’t mean what clients or employees are going to get 100% of what they want 100% of the time, but that’s silly and unreasonable anyway.

When companies stop providing value to customers it isn’t because they’re just too darned concerned about profits and shareholders, it’s because their management has become dysfunctional and their judgment about *how* to provide value to customers has become skewed. Or they don’t really care about customers or shareholders and are just using the company for their own personal ego-stroking. This generally when shareholders either start selling- tanking the stock- or vote out the board and demand change.

Anonymous 0 Comments

Lot to unpack there:  

(1) people buy stocks as investments.  That means they expect that either the stock will increase in value and/or it will produce income for them.  If they didn’t have that expectation, they would just keep their money in a bank  

  (2) there’s also risk in investment.   If you are investing in something that is risky, you expect that, on average, the return will be higher than if you invest in something that is not risky.  But, you also know that you have a higher chance of.losing part or all of your investment.   

 (3) Shareholders *own* the company.  Companies exist mainly to benefit their owners.  Yes, along the way, they benefit other people (customers and employees, among others), but if a company’s management decides that the company’s owners are not important, those owners will find new managers.

   (4) Money (i.e. cash) may be finite, but the total amount of wealth increases and decreased constantly. A woodworker can take $200 worth of wood and produce a $1000 dining room table.  He has made.himself wealthier by $800.  On a larger scale, 30 years ago, Amazon didn’t exist.  Today, it’s worth something like $1.6T.  That’s $1.6T that just didn’t exist 30 years ago.  

Anonymous 0 Comments

It sometimes happens that as a shareholder you realize your investment is never going to make profit for you. The sane thing to do in such a situation is to sell off your investment and recover as much of your losses as you can. If all current and potential shareholders think this is the case, it will be closed and it’s remaining assets will be liquidated. Because business is not charity, a company is not run to provide a service or to provide jobs, a company exists to make profit for the owners, because why the f would you want to own a company that doesn’t?

Anonymous 0 Comments

Markets are competitive. It’s kind of like how fans expect their team to win despite there only being one ultimate winner in the end. At least in a market, there are multiple winners.

Anonymous 0 Comments

Why does everyone keep posting nonsense about “infinite growth”? There’s no “need” for infinite growth. More to the point, what’s so unfathomable for a few percent growth when that’s basically normal and completely doable.