I have recently read two articles that have totally overturned everything I learnt for economics. Firstly (I have it filed somewhere) was an article about a blue-chip company who was about to crash by a fair percentage following a warning the increase in their massive and regular profits were going to be less than expected!
These guys were making about a billion, and I'm sure by cutting some of the champagne at the christmas parties and switching to business from first class plane travel they could have recouped the relatively minor difference.

Then I heard on the radio a hi-tech firm which had been around for a few years and made about a £50 million loss every year, and were still trading, and hoped to make a profit in the next year or two. Now if the previous company had shocked the stock exchange by squeezing a little less out of their customers than intended, but the second firm had materialised close to £200 million and lost it and still paid everyone and kept the shareholders happy. Am I in the wrong universe now without noticing it as to me, a three year loss at the gross national product of many African countries implies a lack of financial resources, even if they 'expect' to make huge profits in the long term (like anyone could tell- why do betting shops make so much money?).

Have I missed a point, or has capitalism (which I agree with in principle) become a little, how should I say, bent out of shape (with emphasis on bent)? Something in the State of Denmark smells very off to me, and I'd like to know how the experts decide when a profit is bad and a loss is good. If any of the actual stories would help I'll try and find them, but the fact this happens at all is enough to create a mystery, and I'm sure it's not confined to the two companies I heard, they are just the most extreme examples and pretty worrying to me as well. Can anyone make sense of it for me?

I guess it could be argued that capitalism never ceases to defy logic, which in this case is definitely true.

Quote:

---

Firstly was an article about a blue-chip company who was about to crash by a fair percentage following a warning the increase in their massive and regular profits were going to be less than expected!

---

I am in no way an expert, but I think there is 'profit' and 'profit', one being the number companies come up with when adding up their sales and accounting for tax, and the other being found when you take into account assets and liabilities. In this case, maybe the company took on more debt, sold some assets or got landed with more liabilities...Any of these things would be enough to scare the market, because of the ramifications for long-term profitability. I'm not explaining this very well

Quote:

---

Then I heard on the radio a hi-tech firm which had been around for a few years and made about a £50 million loss every year, and were still trading, and hoped to make a profit in the next year or two.

---

This one is a whole lot sillier. Maybe they are undertaking a huge investment program, which involves quite big losses now to get bigger returns in the future...Or maybe it's just major, big-time, misguided optimism

All this is pure conjecture, and I don't know if it helps you in any way...Hope you find your answers!

Purchasing shares is buying into the future of a company and not necessarily how it performs this week or even this year. Imagine a company that's doing fairly well and its share price reflects that. The company then invents a widget that's going to take the world by storm (they think) and the share price rises in anticipation of massive future profits. At the end of the year the profits have gone up, but by nowhere near the amount expected - the world wasn't as enthusiastic about the widget as hoped. The shares now look overpriced and they fall to a level closer to what they were before, which is a realistic valuation of the company.

In your second example the company is still working on its widget and the test marketing looks good. They are still making a loss, but the ever-hopeful punters expect to see healthy profits when it's launched, hence the shares go up.

Remember, buying shares is like betting on a horse race. Back the safe option (the big, stable company) and you'll get a fair return on your money, rather like taking the short odds on the favourite. Back an outsider at long odds and you'll make a big profit if it wins. The only problem is that outsiders don't win too often.

I think you've both explained it more or less, and it's partly down to rough reporting, as unless you're an economist, the summaries the papers produce give little logical background to the reasons apparently contradictory information is important or vice versa.

If I asked someone form the city they'd give me chapter and verse, but meanwhile I know this article is within reaching distance of me, but lost in files. As soon as I find it I'll summarise the points here as this was a truly weird story, or badly reported, probably a combination of the two. Really the financial pages contain many reports incomprehensible to the lay person and the few papers like the Daily Mail and Mirror who do simple question and answer lists to 'What does this story mean' save any specualtion or confusion, but this only happens with major stories. Otherwise reading reports will make most people believe things are ten times worse than they seem as they nearly all need expert interpretation. Plus an element of randomness as well...