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PRODUCT.|PHILOSOPHY.|LIFE.

Wall Street only cares about Return on Investment



So should you.

When your performance, your bonus, your promotions are all decided by how much money you earn for the firm, it is natural to focus all your energy on increasing return on investment. Every action taken by every company is evaluated in terms of the future revenues that will come in as a result of the action taken. The future revenue earning potential of a company single handedly determines the stock price of a company, and thus defines the potential wealth of shareholders.

There is a high level of similarity between the way a person leads her life and the way Wall Street functions. Just like firms on Wall Street evaluate investment options based on future revenue earning potential of those investments, a person does the same with her life. When someone spends a lot of money to attend a school of repute and obtain a degree of repute, it is with an expectation of securing a job which enables earning more than what is being spent right now. Return on investment. This is similar to a company establishing an office in a different city or country.

All this is good. Necessary. But the sad part is that all evaluation is only in terms of future revenue earning potential. The stock price of a company doesn't go up when it announces that it will spend more money in manufacturing in order to improve the working conditions of the labourers in the manufacturing plants. Even though it will result in benefits for thousands of people, it will not improve the future revenue earning potential. This keeps a lot of companies from taking those steps to improve working conditions of people. Instead, they end up doing the bare minimum necessary for running business as usual and improving revenues and as a consequence, improving their stock price.

You can do the same. Majority of the people today lead their lives in this mindset. Wanting to constantly improve future revenue earning potential while doing the bare minimum necessary on every other front.

Unless most of us understand that Wall Street-like behaviour is only one aspect of our lives, and start doing things to improve future potential of things other than just revenue (income), we will always be looking over our shoulders to see who is catching up. 

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2 comments:

  1. First, the exception: TATA :)


    Second, isn't this because of the incentives provided by the 'principals' i.e. the stockholders? They are investing with the sole purpose of high (and quick) _financial_ ROI. So everything else takes a backseat. Investing in improving working conditions doesn't help them exit their shareholding with a decent financial return quickly.


    That's why companies are now using the Balanced Scorecard/Triple Bottom-line tools. They realize that financial performance alone does not tell the whole story, and that Milton Friedman's statement that "the business of business is business" - which encourages profit-centric corporate houses to concentrate on financial performance to the exclusion of everything else - is flawed. Rather companies and private investment have to be the vehicles of social change and improvement!

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  2. Congratulations on finally breaking the Disqus barrier.
    I understand that companies have other agendas. That's why my post was about learning that aspect, but not being limited by it at a personal level.

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