> You can't operate a successful company (i.e. with a decent ROI) if you're sitting on a Scrooge McDuck cash vault.
Of course you can. There are thousands of examples around the world - not least the great success story of the last decade or so, Apple.
Minimising your cash holdings is a microoptimization. It might get you a fraction of a percent more return in good times, but that doesn't make it wise.
The purpose of being in business is to make more money than you could by putting the money in an interest-bearing account. Another way of saying it is there is no point to operating a business if you cannot make more than the "opportunity cost".
> Minimising your cash holdings is a microoptimization.
What businesses are in business to do is put cash to work earning more than the opportunity cost, often meaning about 15% ROI.
That certainly is not a microoptimization.
In fact, what most businesses do is borrow money at, say, 5%, and then invest the money so it earns, say, 20%, and therefore make 15% overall.
I do something similar with my investments. I borrow money and buy investments with the borrowed money.
It's similar to borrowing money to buy a house, and then selling the house at an appreciated price to make many multiples of your down payment.
> In fact, what most businesses do is borrow money at, say, 5%, and then invest the money so it earns, say, 20%, and therefore make 15% overall.
Getting more of your capital as debt is a microoptimisation (unless there are special circumstances like different tax treatment, and usually even then) - that's the classic Modigliani-Miller result. Holding more cash makes your nominal return on equity lower, but improves your cash position, and unless you push it to the point where you're taking a real risk of actually going bankrupt the two effects balance and your risk-adjusted return is the same.
> I borrow money and buy investments with the borrowed money.
Exactly. So it really doesn't make a lot of difference how levered a given company is, because an investor can always make a more or less levered investment in the company - if a company has a lot of cash then an investor can lever up a lot, if a company has a lot of debt that same investor levers less or not at all, and ultimately either way the investor gets the same level of risk and the same return.
> It's similar to borrowing money to buy a house, and then selling the house at an appreciated price to make many multiples of your down payment.
Not really - there are all sorts of special treatments for home mortgages (in particular the mortgage interest tax deduction, the most horribly regressive piece of the tax code) that mean you're genuinely disproportionately better off to do one. But it's rare for something like that to apply to corporate borrowing.
You're never going to make much money if you aren't willing to take on risk.
Elon Musk at one point was within hours of personal bankruptcy with Tesla when he managed to secure more funding. He's the richest man in the world, and got that way by taking on enormous personal risk.
How wealthy would you be today if you put everything you had into Amazon stock the day of its IPO?
Yes, but the world doesn't work better if everyone maximally leverages their way into every weakly EV-positive (or EV-negative) high volatility play. If everyone is maximally leveraged, any tiny negative disturbance wipes out all wealth.
At some point, you're just hoping to get lucky, and to leave other people (debtors, governments) holding the bill if you don't. This is what people talk about when they criticize others for "privatizing profits, socializing risk."
Back to Boeing: Boeing put up really good numbers by gutting engineering and manufacturing organizations, hoping it would all turn out okay. For awhile it did, but then it didn't.
And it's questionable how much of these costs Boeing is going to bear, because there's a whole lot of talk in policymaking circles about how to keep an important defense manufacturer and top manufacturer alive (through contracts, tariffs, and supportive policy).
A degree of risk is priced into the interest rate. I still have a fiduciary duty to my lenders to not take undue, undisclosed risks. In practice, people get away with this except in the most egregious cases, but that doesn't make it less wrong.
Worse, systemic risk isn't priced into the interest rate, because the government tends to bail out the banks.
Everyone using leverage and betting on things going up forever is a really big part of how you get 2008. A lot of people made a ton of money in the run-up to 2008 (privatized profits); the population as a whole paid the costs (socialized losses).
edit: I wrote "borrowers" above when I meant lenders.
Boeings choice to not sufficiently invest in its core products while pumping its stock through buybacks belongs solely to Boeing and Boeing’s board. The impact to their reputation was a predictable and ignored consequence.
In Boeing’s case it has very little to do with coronavirus, which was just a related example: some businesses set aside enough seed corn to survive without help, and others didn’t.
It wasn't Boeing's fault that the governors shut down the economy, something that had never happened before in the US.