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A great answer to those who denounce the “excessive” profits made by companies

Commenting on this Guardian article, someone called “weejonnie” says,

If you want to participate in the gross corporate profits why don’t you buy shares in the companies. Decide which ones are making far too much and invest in them.

Or has that gone over the average left-thinking person’s head?

Yes, it probably has. So spell it out. Tell the next person who makes this argument to you that since he is so sure that corporate profits are, as the original article puts it, soaring at the expense of homeowners, consumers and students, then there is no reason for him not to put his money where his mouth is. He can always give his new ill-gotten wealth away away to the poor students if it bothers him. If you get a bright one he might independently discover the concept of “risk”.

33 comments to A great answer to those who denounce the “excessive” profits made by companies

  • pete

    We never hear of profit hating, state employed Guardian types refusing that part of their wages which comes from profits of companies they disapprove of.

    State employees are paid by the profits and employee tax money of every kind of company, including pornography empires, polluting car manufacturers, evil oil companies, junk food chains, arms manufacturers, tobacco companies, their reviled Sky TV etc etc.

    They must assume that this money becomes sanitised the moment it is paid to the government for the purpose of paying their wages.

  • OK, let’s assume some corporations do make excessive profits – you cannot benefit from those profits by buying shares therein because the super-profits are already ‘in the price’.

    In other words, you have to pay the previous owner of the shares for the future super-profits which you will get instead of him.

    See also: just because there is a free market in something (i.e. shares in a monopoly company) does not mean that a large part of the value of those shares does not merely reflect the underlying monopoly. A utility company which has a monopoly of e.g. supplying water in an area (in the absence of price controls, OFWAT etc) is still a monopoly even though you can freely buy and sell shares in it.

  • manuel II paleologos

    One of the fascinating things about the BP Oil Spill was the shocked realisation that their huge fall in profits actualy impacted many people’s pensions and investments. It just didn’t seem to have occurred to anyone.

  • Cousin Dave


    “But… but… I don’t want to have to buy shares. I want the government to give them to me!”


  • jdm

    That’s right, Mark, what’s the use?

    If you missed out owning the shares of the filthy profitable MegaCorp prior to the most recent profitable quarter, they’ll never ever make that kind of money again – heck, they may not even make a profit ever again. That way, that almost previous owner of those shares will have to sit on those shares! Yeah! No profit for him!

    Nor should one invest in monopoly-like firms like utilities that hardly ever pay out handsome quarterly dividends in lieu of capital growth (and those capital gains – boo! bad!).

  • thefrollickingmole

    My own company charges a massive 120% pa interest (if we expressed the price as that).

    So according to Guardian types I must be making 120% on my investment every year eh?

    10% franchise fee
    10% goods and services tax
    owed $80,000 by the tax department, so far
    Have the equivilent of one years income tied up in bad debts…

    Thats risk.
    Thats why my margins are so high.
    If I was given a government garuntee Id be paid on time, every time I would halve my rates or more overnight.

  • Liberal/Progressive Motto:

    Businessmen make evil profits. Progressives make blessed salaries.

  • Johnathan Pearce

    I know this is not an original point, but a lot of people, even those who might think they support business, will call for bigger taxes on profits, and not realise what is called the “tax incidence” effect. If say, a government slaps a heavy levy on banks, the bank does not pay the tax – individuals do: shareholders, partners, borrowers (higher interest rates), savers (lower rates), staff (lower salaries), customers generally (crappier services).

    But it is so easy for a politician or some sort of anti-business type to rant about how big, evil capitalists should be taxed, and then ignore the after-effects. Most of them have no idea, or interest in, the knock-on effects of taxes. Taxes are a cost, and with all costs, they get passed on eventually.

  • @jdm – I think Mark’s point is that while MegaCorp may make those filthy profits again, the return to the shareholder from them is already factored into the price you pay (less a little risk, of course). For weejonnie’s original point to be as good as it at first appears it would have to be something like:

    If you want to participate in the gross corporate profits why don’t you buy shares in the companies.[sic] Decide which ones are about to make far too much but hardly anybody realizes that yet and invest in them.

  • Chuckles

    In naive and/or primitive belief systems a very common central belief is that ‘the pot is a fixed and invariant size’ – e.g. there is only ‘so much’ money.
    From this it clearly follows that if a company is making ‘excessive’ profits, they are getting ‘more than their fair share’ and are stealing from the rest of us. Or using ‘witchcraft’, or whatever, and are therefore evil and must be destroyed so that there will then be more for the rest of us.

  • Mark! Mark! You forgot to mention LVT!

    Actually, your approach kinda mirrors the land issue*.

    If consumption was taxed more and corporations/individuals less or not at all, “tax evaders” will be more individuals in a cash economy and less “evil business/banks”.

    * LVT would be the State levying capital gains taxes so that any profits from price rises or dividends were (cancelled out**/) taxed so that owning shares becomes (almost) worthless to the holder but “the community” could benefit, for it is the one buying the goods and the State the legal infrastructure permitting safe and efficient commerce, natch {/sarcasm}

    ** far too many supporters of LVT want this to happen to ignore it. It is a shame, because the toxic nature of that faction makes me very wary of giving the LVT boulder a shove.

  • jdm

    Thanks for the further explanation, PaulH, but I understood Mark’s point the first time. It was clearly my sarcasm that was lacking focus.

    The point of my sarcasm is that it is virtually impossible to invest in (as opposed to bet on) companies if one’s decision horizon is one quarter (I am assuming American financial customs). One can just as well be a day trader.

    The price of a stock holds a lot of information and is certainly not limited to the most recent financial report. Also included are past reports individually as well as cumulatively to indicate a trend, expectations of the future, not only with regards to mgmt’s performance thus far, but also the company’s market, its competitors, the nations in which it is located, etc. I’ve probably forgot some things…

    Mark’s comments were understood by me to indicate that, ultimately, investing is a pointless exercise – something I know to be patently false. And yes, sometimes one buys something that gives someone else a profit (roll eyes), only to watch price drop in the near term. But if that investment was made because of a belief in MegaCorp’s ability to conduct business, then near term price movements are mostly uninteresting except as buy signals.

  • Giles

    This comic (Link) nicely summarises that investment strategy.

  • John B

    A person should (obviously) be free to make as much profit as they can.
    If the product is so good that others are willing to pay over the odds to buy it, then others will start manufacturing it so they, too, can make loads of bucks.
    If it is not then someone is sustaining a loss in some way and at some point reality will assert itself. They will come to their senses.
    What is bad is when artificial profits can be sustained because of some artificial privilege, probably implemented by some sort of regulatory control.
    Even there, in the end, reality will assert itself but a lot of people could be hurt on the way down, of course

  • jdm – I agree there are many factors that affect the price of a share. But Mark’s point as I read it (and the one I’d originally come here to make!) is that the expected level of ‘excessive’ profits it is making will already have been factored into the price. So buying the shares to participate in those profits won’t work*. If you want to participate in such notional profits you have to expect that in the future it will make even more ‘excessive’ profits than it already has, or at least more than the market expects it to make. That makes the appealing-sounding claim of the OP a flawed suggestion.

    (*More accurately, and forgive my ignorance of the correct terms, it will work to give you a return at about the utility cost of the cash you invested, on average)

  • Laird

    PaulH, your thesis (and Mark’s, for that matter) assumes an efficient market. The reality, of course, is that markets aren’t efficient (or at least, not completely so); they are rife with inefficiencies, the principal one being human emotions.

    John B is right: any extraordinary profit would be quickly eliminated by the entry of new competition into that market. That’s why free markets are so effective, and why no company can make “excess profits” for long unless there is a government protecting them. True monopolies are nearly impossible, and are unsustainable without government intervention.

  • Johnathan Pearce

    I am sure Laird knows this, but the efficient market hypothesis, in its strong or even weaker forms, has its challengers. Generally speaking, though, “super-normal” profits do eventually revert to the mean in the absence of government restrictions on competition, etc.

  • Richard Thomas

    Pete, don’t you know? The money all belongs to the government anyway. Companies and individuals should just be grateful they’re allowed to keep any of it.

  • Richard Thomas

    What somewhat muddies the issue is that so many companies do not provide dividends. This means you are not sharing in the profits directly but just on the likely ability to be able to offload the shares to someone else for more money later, based on a somewhat nebulous link to the company being able to reinvest its profit for growth (or to use profit to buy back shares, increasing their value).

    So, if a company is making going to do well, you will either be able to share in the profits in the form of dividends or increased share prices due to reinvestment of profit. To say that it’s impossible to profit from a company you believe is making excessive profits is just silly.

  • John B

    The bankers are, it would seem, largely the cause of the problem insofar they get together, create central banks (Fed, BoI, etc) and proceed to screw the ordinary folk, to their advantage.
    The financial whizz kids who play with the money, like Soros and others on all sides of the imaginary political divide (when it comes down to shafting others financially) are the problem.
    The manipulators.
    Not people trying to make as big a profit as possible.
    The current hostility against bankers taking big bonusses, by the way, seems to me to be a smokescreen to deflect attention from the real nasty that the bankers and friends do, which is to screw the currency, the economy, and the common people for their elitist lifestyles.
    This Mises(Link) from yesterday puts some of it rather well.

  • Johnathan Pearce

    Richard Thomas, one reason why many firms, of course, don’t provide dividends in some countries is government tax policy, which historically has favoured debt vs equity, hence explaining high levels of leverage in some sectors and why firms often hang on to their cash rather than pay a divvy. That needs to change.

  • Laird – agreed about the efficient market issue, but in this case I don’t believe it’s a significant factor. There are many ways that people have imperfect information about a companies profits and prospects, but the point about these ‘excessive’ profits is that they’re too big to hide. Shell (to pick a company I imagine many would see as ‘guilty’ in this regard) has a great many issues factored into its share price, but the £1.6 million pounds an hour that it makes is the factor we’re being invited to take part in, and that’s really quite visible.

  • one reason why many firms, of course, don’t provide dividends in some countries is government tax policy, which historically has favoured debt vs equity, hence explaining high levels of leverage in some sectors and why firms often hang on to their cash rather than pay a divvy. That needs to change.

    Jonathan, can you please expand on this?

  • Laird

    PaulH, I’m frankly baffled that you can first talk about “excess” profits being factored into the stock price and then make a completely nonsensical statement about Shell making “£1.6 million pounds an hour”. That suggests to me that you don’t really understand the issue. Gross numbers are irrelevant; what matters is the return on the firm’s invested capital. Shell is a huge company, so of course it’s going to have huge revenues; so what? What matters is its ROI (which is what drives the “factoring in” of all those alleged “excess” profits). I don’t have the specific numbers for Shell, but the oil industry as a whole makes only 13% on its capital, which is merely an average return. See this table. Where are all those “execess” profits? Oh, that’s right: they’re in the publishing (56% ROI). tobacco (48%) and cosmetics (32%) industries.

    Big numbers doesn’t mean outsized returns, but that’s a common fallacy and a trap for the ignorant.

    Alisa, in the US interest on debt is deductible by a business for tax purposes, whereas dividends paid to its shareholders are not. (Both are, however, includable as taxable income to the recipient.) The result is that interest is paid out of pre-tax income, but dividends are paid out of after-tax income. That’s why we say that there is a “double tax” on dividends, and why there is a corporate bias toward debt rather than equity financing.

  • Laird

    Aargh! The arrogant smitebot strikes again!

    “Sole judge of truth, in endless Error hurl’d;
    The glory, jest and riddle of the world!”

  • you want to talk excessive profit, let’s talk legalized plunder first. at least companies are producing something, unlike the government.

  • Richard Thomas

    Alisa, I am aware of what Jonathan is describing. Dividends are taxed significantly more than gains from share price inflation so companies work to increase their share price rather than pay dividends. This is typically achieved through growth or share buybacks.

    Share buybacks aren’t too bad but, in my opinion, authentic, reliable growth can be hard to measure. What good is a company making massive profits if it goes and spends that money on acquiring a company that has no value? Careful analysis (rarer than it needs to be) may give a clue as to what the real increase in value is but I would suggest that there’s nothing like cold hard cash coming in to tell you how a company you own part of is doing.

    So the tax position causes a masking of useful market information which allows bubbles and other distortions of the market and, I would suggest, likely benefits larger, “professional” investors at the expense of smaller amateurs. It also causes a drive for growth when such growth may not be healthy (in animals, unneeded growth is called cancer). The simple answer is that all gains from share ownership, whether by growth or by dividends should be taxed in an equal manner (preferably not at all, natch). That may be too simple an answer though (and I’m sure someone will point out why that is so).

  • Laird

    Alisa, I addressed you question, as well as PaulH’s point in the preceding post, in my comment which has been under smitebot interdiction for nearly 24 hours now. I know that you’ve been waiting in breathless anticipation; your patience will doubtless be rewarded sooner or later.

  • jdm

    Richard Thomas, I don’t disagree with anything about which you wrote, but Johnathan did write about the balance between debt vs equity. This, to me, means taking out loans (aka issuing bonds) vs issuing stock. You didn’t really touch on that so I guess I too look forward to an explanation from Johnathan as to what he meant.

    Also, I would mention that I generally dislike stock buybacks, especially with companies, mostly centered in high tech, that rarely or never pay dividends. In these cases, the companies are, in my opinion, using cash on hand to maintain a stock price that is being diluted by issuing options to its employees. Arghhh.

  • Richard Thomas

    jdm, ah the whole debt vs equity is a whole other ballgame.

    Buybacks are not necessarily intrinsically bad. It’s more in the implementation. The problem (usually) is that the company has a bunch of money and has to do something with it. The question is, who can make better use of that excess capital, the company or the investors? Personally, I’d say the investors but the government has managed to distort the market once more…

  • Thanks Richard, that seems to answer my question.

    Laird, thanks to Richard I can breath again – unless you disagree with him or would like to add something? In any case, thanks for taking the time to answer:-)

  • Laird

    Hey, my 3/31 post has emerged from Smitebot purgatory!Why it took two days to do so remains a mystery, however.