selling at a loss is operating at a loss. No matter how many you sell.

I hear people rant all the time about wal-mart, and other big name chain stores, and how they “sell below cost,” and how that is really unfair competition and it’s ruining the marketplace because they are edging out their competition who can’t afford to sell things below cost. News flash: They can’t afford to sell below cost, either. Do allow me to explain:

Consider that in today’s market, investors are either savvy consumers, or they are paying a savvy consumer to be savvy in their stead. People, just don’t throw dollars around at stocks and hope they turn into something, at least not the marjority of people, and at least not the people who, as a rule, make up the market. People pick and choose stocks based on a variety of things, but ultimately it comes down to which ones they believe to have the greater return on investment (ROI) over time.

Also consider that business, in general, borrow almost all of the money that they use to invest in future plant equipment, facilities, and long-term, income-generating assets. And they do this either by issuing bonds, or by issuing stock. The extent to which people are willing to pay for their bonds or stocks is greatly dependent on the company’s ability to make good on their debt in the future. And the investor is not only concerned with “are they going to pay me back?” in the case of stocks, but also, “what return am I going to make on my investment over time?”

And we have to look at it this way. Certainly, a Wal-Mart or Home Depot can possibly sell below cost for a limited time, in order to drive out the immediate competion, in the short run. But no firm, no matter how large, in a free society, can operate at a loss to perpetuity. Eventually, their prices are going to reflect the market value of their wares and/or services. Perhaps they will be more expensive, in an effort to recoup some of the losses they incurred while “driving out the competition.” As soon as their prices reflect what the market is willing to bear, the opportunity is there for a competitor to enter. That being, they are selling at a profit, and arguable others could find a way to sell at a similar margin. At this point, the company, in order to drive out the competition, needs to start operating at a loss, again. And they will need to do this time and time again.

Investors are savvy. Investors want to experience positive ROI. If a business is sinking its capital into subsidizing losses over a long term, the ROI is either greatly diminished, or negative, over time. Investors do not like this and they will run from it like the fucking plague. This happens because they realize that, as your company spends their money (investment) on subsidizing losses, the money could be working for them in a much better, dividend-yielding investment elswehere in the market. Stock prices plummet as investors dump the company stock, and it seems that nobody is willing to buy it. They begin to invest their money elsewhere in the market (perhaps investing directly in your competitors,) because they are somewhat prone to investing money, after all, it doesn’t do any good sitting in a deposit box or a shoebox under the bed.

This has a two-fold consequence. The first being that the strength of your competitors is bolstered by the influx of capital investment, which allows them to spend more money on research and development, plant and long-term assets, etc. Conversely, your firms ability to generate working capital from investors is hampered, because the money is going elsewhere, where the investors see a greater potential ROI. Because of this, your firm is unable to maintain its facilities, develop new products that the consumers want and need, service its existing debt and so-on. It follows that, the longer you try to subsidize losses, the harder those losses will be to subsidize. And the more you subsidize losses, the less appealing your company stock becomes to potential shareholders, and if you can’t finance your future investments, you’re basically kaput.