Cheap and abundant capital can even wreck mature companies by encouraging willy-nilly expansion. The origins of General Electric ’s recent implosion go back, according to a canny financial observer, to the low-cost capital that Jack Welch’s star status secured for the acquisitive conglomerate during his tenure as CEO from 1981 through 2001.
We should rejoice, not grieve, if market volatility forces users of capital to pay more attention to its cost, and improves the quality of their investments. Besides, stock markets will fluctuate, like it or not, as J.P. Morgan famously said. Share prices reflect not only current profits, but what investors expect to receive over decades to come. But how much profit a company will earn—and sensibly reinvest or pay out as dividends—is a wild guess. Even when Apple enjoyed unquestioned dominance in its markets, investors sensibly anticipated good times wouldn’t last forever. But they couldn’t reliably quantify this anticipation. As a result, the company’s stock price fell by nearly half in eight months after mid-September 2012—and then doubled in under a year and a half. Now Apple stock has lost a third of its value from its early-October peak.
Join the conversation as a VIP Member