@@elthomas_ The reason that's the case is because of a little concept called the 'limited liability company'. It isn't how companies always were - it's an artificial invention created by law (albeit not a new one). There was a time when your business going bust could lose you everything, or even put you into debtor's prison. The funny thing is, capitalism took off only after it was created aka after the level of risk was lowered by state decree. And people say capitalism is all about bold entrepreneurs taking huge risk lol...
@@ArawnOfAnnwn limited liability make a lot of sense if you have nothing to do with running a business. Buying into your neighbour's lemonade stand should not cost you your house. It also make sense if you're running a business as a paid director. It is just a job. Make less sense for the founder on the other hand who are running the day to day business.
This business model encourages monopolies because small companies will eventually be put out of business and the consumer will be left with these monopolies. In the long term the consumer will pay the price of their profitless expansion
Which is ironic since the entire point was the opposite. By being able to get money by investors before you turn a profit, you can build a product/service before the big companies who have way deeper pockets do. It lets you get your idea up and running (especially when we talk about service-based companies) before the Apples, Googles or WalMarts of the world come in and do the same thing for 50% cheaper and 50% quicker because of their scale.
unfortunatly the information presented is utterly wrong - without understanding investment into revenue growth and writeoffs plz do not short amzn, tsla and the likes! they first capture marketshare, and have the potential to be vastly profitable in the future - everyone who can think ahead pays the premium on those stocks today, everyone else should ask "do i understand this fully or am i missing something?" but unfortunately says "everyone is dumb but me." ... choose who you wanna be
@@EconomicsExplained I have always been concerned about the US system of 401k, 403b, etc - where people pay into the stock market on a schedule, regardless of how profitable the market is, which businesses they are investing in (most employees don't even know whether their investments are in large cap or small cap, much less with which investors or actual company shares). It made me think, like 15 years ago, that this will have to result in increases in p/e ratios, as people just buy stock with no question about what they are buying. In such an environment, of course unprofitable companies can get investors. Same with REITs. They are legally mandated to buy real estate as the retirement money flows in, regardless of market conditions or the absurd cap rates on income producing property. Now the REIT strategy has become to buy everything and turn the entire country into tenants. At the same time, we have China buying mega billions in American property (of all sorts), especially real estate, so fast they don't even care what it is they buy any more. We are headed to a collapse. We have to be. So, how does one prepare? I have no idea, because the governmental response could invalidate any sound strategy - as socialism, mass confiscation, wealth taxation, redistribution, etc., could obliterate any strategy.
@@abdulqadirhussain7864 we're really close to automating jobs that involved repetitive cognitive functions . So if you choose finance make sure it's a sector an Ai would have a harder time doing.
Very good overview of this phenomenon! One point you gloss however is that it’s not just the investors of Uber that subsidize that 30% of the cost of each ride. It’s the drivers themselves who shoulder the burden of maintaining the fleet and providing the infrastructure.
@@bighands69 And yet other professions and jobs don't require you to a) put up your asset for it instead of use the company's assets (the vehicle) b) get the asset ground down and depreciate in value at an exponential rate due to its usage in the job c) get paid pennies which doesn't even include the (much) wear and tear you've incurred on the vehicle. To be fair, the early Uber drivers probably turn a profit even with depreciation involved, since most taxi markets they enter are a closed market with a high price due to barriers to entry, and they don't have many competition among the few other Uber drivers either. Yet once there's an oversupply of drivers? It's no longer profitable. If most Uber drivers understand how depreciation work, they'd immediately get out right now.
@@rolyars Most of them are just offering a faster or easier way to do something that already exists, so yea. But with extremely high overhead and extremely low marginal costs, it's cheaper to lower prices to prevent would be competition than it would be to simply offer a superior product, or the product is so simple it's not clear how to make it better.
Fundamentally - a business must have an actual path to _sustainable profits._ That path may be on a long time frame, but it must exist nonetheless. That's the difference between a sound investment and a ponzi scheme. The latter does not have a path to sustainable self-sustaining profits. If the only way it can sustain continuing operation is by never ending investment, that's a ponzi scheme. This is exactly what was the Dot Com Bubble. "Investing" in business that had no actually plausible business plan to a sustainable self-sustaining revenue stream. Everyone was seeking to get a piece of the next Microsoft or Apple. And the bubble companies sounded "cool". Their "greed" to get that piece blinded them to the lack of an actual realistic business model to a self-sustaining revenue stream. The question is - is what we have now a repeat of that and to what extent?
The bubble now is EVs & batteries. Too many "me too" businesses, too little going for them, and WAY too much money thrown at them. I expect the pop in 1 to 5 years.
@@marvinfok65 and partying right after sacking 5000 employees back then. Well some people are forgetting what happened before 'sanitary outbreak' already...
Lets not also forget. Zombie companies tend to be tax efficient, they do not pay tax, a great place to dump losses. Look at the loan structures they operate on. They may not make any profit , but I bet they pay those loans. And who originally owned the zombie company? those who hold the loans.
The only thing I don't get is how it took folks this long to figure out how to game income tax. It's been around a while; this shouldn't be new. Unless the cost of those loans has only made this viable in the last few decades maybe?
That doesn't make sense. Not having to pay taxes means you don't earn anything either which is less than if you earn something and pay taxes on it. Regardless of how you structure it, you either make profit and pay taxes or don't make profit
This is nothing knew mainly because of amazon model. Keep wasting investors money by not turning profits. Sell products cheaper than the competition who don't have a virtuously endless "well" of investor money to play with. The latter company goes out of business then the competitor who hasn't made a profit can jack up the prices and monopolize market. So you don't create anything better you just underhand and wait out the competition.
This channel is exactly what I needed in my life. It's explaining things about the economy that I knew deep in my heart but couldn't properly understand or explain through a logic
Seems about right, even the average Joe can see it Only companies get to partake in socialism while everyone else is told to “pull ourselves up by the bootstraps”
@@lajya01 milton friedman was definitely not saying the gov should referee capitalism. the big dream was for free market economics to balance its own self. it never did and everyones been cooking the books since. obv the main people who know this are the investors
Clicked as soon as I caught the first whiff of that schweet schweet EE spice. (And boy he's been getting spicier over the last few months). PS; Could you please make a video on Blank Check Companies?
"There are a lot of companies with genuine promise ..." shows the Ares 1-X launch, which was a 400 million USD project to launch a ton of dead weight on an old Shuttle booster. The entire project would be cancelled a few years later. ... that being said, we still love you EE.
@@r_s_p_t1096 I don't think any of these companies have clean enough balance sheets to justify an IPO. Why go for an IPO if they can fool a few venture capitalists and make millions, if not billions of dollars! They'll be answerable to public enlarge if they go for an IPO, which is not in their best interest
I know you have covered it before in other videos. But it would be nice to see more about the impact of how many companies are beholden to shareholders to the point of diving growth against long term success and the potential negative impacts.
@@trololobochum Coca-Cola's marketing has produced incredible value for Coca-Cola shareholders, but has it actually produced value in the economy? Is the market dominance of Coke better than if we had many regional brands of cola products, or if people's beverage choices were more evenly distributed among different soda types, juices, flavored waters, etc.?
I have ancestors who lost everything on an early 1800s scheme to dig the Panama canal that never happened. Others who lost every on fen draining projects. Don't bet the farm, guys, really.
Investors cannot be so generous in the pandemic economy. A huge number of companies have already closed their doors permanently. The market is being taken over by a few mega-corporations as competition disappears.
Up until the moment that the game stops. It is once more a game of imaginary musical chairs. Chairs created from thin air, leading to no real extra chairs being produced. Unless the companies have at least an idea of becoming profitable, they are inevitably doomed to fail. Besides, a market crash is long overdue. The last crash is 12 years ago, 2008.
I've been working in Venture Capital for two years now and, while this is a little discussed topic, it will certainly have gigantic impacts on the future of the global economy. Companies, just like Countries, are blindly aiming for rapid growth while not actually creating value. When no value is being created, money only goes from one person's pocket to the another person's pocket. When people realize price is not just a random value, those with the "Assets" in hands (Governments, Investors, Pension Funds, etc) won't be able to sell them and will go broke.
big thanks, this is so important to know whats going on and why as it affects everyone in the world, no one else has explained this phenomena, Im very grateful
I think there is a misunderstanding here, investors chose these companies because of the net present value of their shares. Why is Twitter more valuable than the New York Times? Simply because the price of having a share in a future monopoly is greater than of a business making profit nowadays. This is what led Amazon to be of the most valuable company in the stock market.
That's definitely not the rationale of nearly all investors. They just see an upward line and give their money to see their money grow. That's the only intelligence modern investors give into their allocation. You do give an economic textbook sorta idea that assumes everyone has perfect information and are all rationale, though it seems such assumptions are extremely flawed and misleading nowadays.
@@Requiemrexx exactly, I have yet to invest anything but I have read tons and watched tons of videos and it is clear to me that 99% of people who are investing right now are doing it blindly just following the upward graph trends, it's just gambling........
@@Requiemrexx I also think it makes it easy for unscrupulous dealers to take advantage of the graph followers, they just have to say something good or bad about a company and watch the price go up or down and buy or sell accordingly netting thenseves a nice profit overnight.
@@FlyingFun.Right. But do keep in mind that investing, in all forms, IS gambling. That's why risk is measured, because the outcome is uncertain and you're trying to make the best bets. Incidentally, this gambling is integral into how the economic system works, as it's the only liquid way to keep your money from degrading over time due to inflation. And yea, the system blatantly favors those with millions of dollars, which get recognized as "actual" investors and not "retail" investors, alongside access to markets out of 9-5, which is very unfair.
@@stachowi nope. In my 40s. No cable package of any kind. Just youtube. So too much youtube. Learned about her through the youtube channel Internet Today.
@@DigitalMadrigal touche! i'm 39 so that backfired on me. Back to your original point... yes because the "smart" money simps over these bullshit companies everyone else follows them to slaughter. If you've been tracking markets like me since 88, you'll see this happens over and over and the regular guy holding the bag pays for it all.
The Market: Biggest economic downturn in decades... Softbank: Let's pump it up a bit... (queues up MASSIVE call options) Millennials: Now is a GREAT time to invest these stimulus checks.. Millenials: Buy Hertz, it's going into bankruptcy, what a steal! Rational investor types: What the F is going on!?
Good video. One thing that I'm struck by is the markets that most of these "Zombie companies" are in. Uber is a great example. The licensing/medallion systems that many places used was it's own deadweight loss. The difference now is where the funding is coming from and going to.
12:16 the kinked hose line near the coupling has triggered my OCD. I can see foresee some fault created in the processing due to this. Please straighten that for the next video ! [Edit] Being unprofitable means paying no or little taxes . So how can we all profit without actually profiting on paper is the name of the game.
8:00 this has always been my problem with non-dividend paying companies. If I'm buying dividend-paying shares off someone who invested earlier, then that's fine - that's just someone selling their for-profit investment. But in companies that aren't paying a dividend, surely I'm just waiting for someone else to pay more than I do? A greater fool, making it a Ponzi scheme And if the company isn't even making a profit at all, it's even more crazy. What am I "investing" in?
"And if the company isn't even making a profit at all, it's even more crazy. What am I "investing" in?" In theory, you could be investing in a company that is developing and building out something that is really valuable to another company. In other words, someone will buy the whole company and create a whole greater than the sum of the parts. For example, RU-vid cost Google several billion and then was losing money for many years. But if you think about it, you can see that Google might be willing to make almost nothing on RU-vid, in order to both gain significant power in the video distribution market while also denying such to, say, Facebook.
Watching EE to try and eventually get into the stock market without making a awful decision is a bit like trying to decide which poison I want to ingest this week
If you truly want to learn good investing strategies I would hasten to recommend the series "Investing Like Warren Buffett" by Preston Pysh. It walks you through all the fundamentals and more advanced topics of value investing in step-by-step style videos, introducing one concept at a time. Despite the crazy market conditions, there are still a lot of great companies to invest in as long as you run the numbers.
Learn finance, economics, and maybe accounting. For me I just dollar cost average and stay diverse globally. The market always looks expensive, even in a bear market.
It's way too early to declare value investing dead. Technological revolutions causing hysteria and extreme valuations is nothing new. at the end of the day the returns are usually dissappointing and value prevails. Maybe "this time is different" but probably not.
Thanks for the video...very informative. The remedy for the "unprofitable companies winning business model" is very simple: no more public bailouts for private companies, ( no stimulus, no quantitative easing, no buying back toxic assets, etc). I wish I could get the someone to buy MY toxic assets!! You'll see company structures and business models change overnight! lol
don't confuse it for "no money printing" mind you - the government is supposed to print money during consumer downturns and delete money during upturns, basically making sure there are always enough jobs for everyone, then reversing it to avoid inflation.
I'm a bit confused, wouldn't the Uber example of these unprofitable companies that try to undercut other companies and obtain larger market exposure be what's called predatory pricing? I thought deliberately not seeking a profit was illegal?
Sounds like we need to come to terms and agree that some business models are doing well at certain points and should work on collaborating instead of competing to sustain growth from my point of view. I also wonder where the notion of Ethical Profit will come into consideration given the current globalisation process currently happening.
The only problem I have with all this is that the founders need to "look successful" to get funding. It really proves how little humans can efficiently take in and actually process. "This guy looks good, has a nice car, goes dancing? So lets invest in him, not the guy who spends literally so much time on an idea that he doesn't leave the basement." "Yeah, what a weirdo."
They measure success in objective ways but in meaningless ways. Like market share. If you're losing money, with more market share, you're just losing money faster.
Much much easier said than done. Money is power, and people will fight tooth and nail to keep both. And worse of all, the so called maintainers of monetary system are rotten to the core themselves. Look at Deutsche Bank.
@@manthanf1 Fiat money is confidence game that enables the power of banksters. Confidence games work until they don't. Money is chosen by the free market by people picking an asset to store the value of their labour in. No one can force you to use an inferior form of money. Fiat money will go down in history as the greatest fraud ever committed on humanity.
The more older I get, the more convinced I get, that no matter the system that is created, it is destined for pretty much the same thing. While it might be possible to "fix" money, I doubt it can happen when humans are part of the equation.
I happen to listen to a big company gave a talk. He said some founders asked him to invest, but the whole business was to keep getting investor until IPO. Their sole purpose is to get IPO and then exit. He said he had to shut those guys down and ask them to come up with a more ethical business proposal.
He chose his words a little more carefully than that. He said companies that don't have profitability as their central goal. Amazon is technically "profitable" and is listed on the S&P500, but clearly their goal is to minimize profits. I'm pretty sure that's what he meant.
Cash flows are arguably more important than profit. Amazon’s cash flows have been pretty big for a while. They just reinvest in the company so that their overall net profit is low.
Even with Ubers subsidies you can’t make much money. I had a friend that did it as a side gig in Dallas. We sat down with all his mileage, and what he got from Uber. All told after fuel and depreciation he was making about half minimum wage and destroying his car.
@@EconomicsExplained you upload exactly when I'm making my evening coffee, nothing like watching a smooth Aussie accent explaining economics with a hot cup of coffee! :D
And besides of long explanations, not making profit as well means NOT PAYING TAX. Actually, looking into some of the worst offenders they actually make a lot of profit in their holding companies, but only in countries with very low or 0% tax, whereas main business we know them for is just limited liability vehicle operating at loss. For example that is how UK insurance market works - insurance companies continuously makes loss or tiny profits, but their parent companies and underwriters keeps loaning them money, underwriting policies and extracting profits as interest on loans. So they are very directly fraudulent and avoiding paying tax via loopholes, rather than being "truly unprofitable".
Excellent video! This makes a good reference video to explain to people in layman's terms why the economy is actually bad while it is good according to the stock market.
Recommendation for next subject. - currency valuation - how much cost difference can it occur for an eg economy to change from floating to fixed rate. - factores involved in the valuation process - role of assets held by forex banks in the same process - cause of currency devaluation for economies right after dropping out of fixed rate.(Malaysia, Thailand etc)
As pensions go the way of 401Ks, the government is forced to incentivize the stock market more than their own programs. Seeing that, the businesses were placed in the prime opportunity to make a massive surge through any means necessary
Well it depends. If it's a flawed business model in the first place like uber or airbnb (long term) then yes. If you are looking at disruptive companies without flawed business models like Tesla/Square then no. There is a lot of potential for profits when companies are allowed to grow for quite a while. People need to stop investing in companies where the potential for profits isn't even there.
@@VeryProPlayerYesSir1122 Try to ask yourself the question. What are the potential risks of this companies business model? If you'd ask that question with Uber it's pretty clear. And honestly. Personally I like to look at the whole picture. Company culture, ceo track record etc.
Internet Troll I‘d say try to imagine the end state of the company. If that state is very dominant and has lots of profit potential then the company makes sense, no matter how far in the future that is, as long as growth is sustained. Or try to think what this company could do now to make profit if they wanted to and if that would be possible at all. Also one can differentiate whether the company is loosing money while operating or just investing more in growth than they profit.
Very interesting. One question keeps going through my mind: according to what criteria would you want to put rules in place to filter out the bad guys from the good guys (without those rules being detrimental to the economy as a whole)? Stated otherwise: I tend to think that most people will agree this situation is not desirable, but how to fix it?
Just seeing the title I'm hoping you have the gumption to mention profitless Tesla - they use tax credits to make it look like they are profitable when their auditors aren't checking (look it up). They make cools cars but it's a profitless business.
Or maybe a rule that companies that haven’t reached profitability after let’s say 5 years are not allowed to do funding rounds or get investments until they again are profitable.
@stockart whiteman You're right, but something has to change in the law because the more of these zombie companies gets started the more unsustainable it is. Obviously my proposal could equally work for 10 years to reach profitably , and I would say after that you're not really a good business if you can't reach a profit, and deserve to get classed as an opportunist zombie company. And should give way to real business that actually does it right.
Just stop the money printer and all this would end. But nooo, we bailed out the so called "too big to fail" companies in 2008 and after a decade of zero interest rates we have all these zombies on live support. What a surprise. BTW, the money printing is unconstitutional, so no need for new laws. Just enforce the existing ones.
The problem is that we can't distinguish between the two easily. When we invest in passive funds, we invest according to the capitalisation. So what one should do is to have passive indices that sort stocks by profitability/earnings per share/dividends. There are already indices for dividend paying stocks. We just need more of them. Unfortunately financial innovation is pretty slow and also investors are slow researching trends.
Not at all, because an IPO happens when a company has big plans and needs money to get them done, practically no company thats profitable would ever go public since it wouldve had to source all the funding it needed before having the option to go public
this is the problem with grand theories and "laws of nature" in economics and social sciences in general. they're just contingent generalizations of unique moments in history.
Worst part is that a very good portion of money invested in the sharemarket is not invested by a 'shareholder', but by superannuation companies on behalf of individuals. The fact the essentially 9.5% of all money earned in Australia is 'invested' feeds this scheme and provides the fertile grounds for this to occur.
Raghu Sajeev Yes, but 4 quarters is only one year of the company’s lifetime. It’s been around for 17. Thus, both what you said AND what I said are facts. You, that Tesla has been profitable for the last 4 quarters straight, and me, that Tesla hadn’t been profitable for years. I’m pro Tesla and love your enthusiasm
@@GCdevine1 You're right that Tesla has been raking losses over the years inorder to fuel its exponential growth. But they always had a roadmap to profitability, they never had to sell their vehicles at discounted prices to grab market share. Tesla stocks skyrocketed this year coz they proved that it can be a profitable company despite all odds, unlike the likes of companies like Uber.
Long time listener first time poster...I'm in the military and a huge economics nerd. I love the work that you do. I have a request for a video on the latest Nobel prize laureates and auction theory.
People act like these days of "boogeyman economics" is something new. Either they do not know, or have forgot, the Reagan years. Or as millennials like to call it, "The age of excess." or something like that.
The thing is, when Reagan took office, stock indices were trading at a PE of 5-7 ish. As far as getting the stock market to go up went, Reagan had the easiest job ever. Arguably, it would have been much more effective to set up a division of social security that ran a stock portfolio and simply having it buy & hold stocks to handle future retirement obligations while changing absolutely nothing else than to do whatever he ended up doing. The main issue at the time was inflation in consumer goods and deflation in the capital markets, and having the govt tax more than spending to keep inflation in check while investing the difference in stocks would have fixed both, and helped in the early 2000s and now when the issue was the opposite.
Reason is some of these businesses are good businesses, “benefit” companies, caring and training unemployed to do good and do well, two bottom lines, see Simon Sinek’s talks on youtube.
I don't think someone as smart as Simon Sinek would advocate for non profitability. In fact, if managers do what he is saying their companies will produce more because workers are happier. And they will be more profitable. It is just that blaming your employees for disappointing quarterly results is a very bad way to run a company. And he is pointing that out.
That's not SpaceX. The rocket is the Ares 1 which was built by ATK and Boeing but later cancelled. Boeing is not a company I would describe as having "genuine promise" right now lol.
Also I think that allowing a company to go so long without making profit could increase the likely hood of monopolies (if they survive). Look how big Amazon is there is relatively no competition.
Not sure if the zombies in the S&P 500 is accurate. Generally they try to keep consistently cash flowing companies in the index. That’s why TSLA, as big as it is isn’t on the index. Is that stat for a particular quarter?
Tesla surpassed the profitability barrier necessary for s&p. It’s likely it’s not in because it’s highly volatile and speculative. With their market cap they would have a big position in s&p and would affect it greatly with their volatility.
In my country the regulator won't even allow your company to be listed if you haven't turned in a profit 3 years in a row. The recent events with respect to GME show that the American regulator is worse than useless when it comes to protecting the interests of the small retail investor.
Operating at a loss is a way to suffocate your less well-funded competition out of existence. Basically, a power-play. That's how I understand this, anyways.