Editor’s note: Today, Porter turns the Daily Journal over to his colleague, Distressed Investing analyst Marty Fridson. Marty spent years at leading firms like Salomon Brothers, Morgan Stanley, and Merrill Lynch. He’s also reviewed mass-market films about finance – such as The Big Short and Margin Call – for Barron’s.

Here’s Marty…

Can we have too many movie theaters?

Well, the answer is yes, and here’s a story of why that is the case and what the consequences are to the industry and the economy as a whole.

The story begins with a term called malinvestment. When capital gets massively allocated to unproductive projects, it’s a case of malinvestment. It’s the economic equivalent of a 15-year penalty in football that puts the team out of field-goal range when it’s down by two points with just 30 seconds left on the clock. You were so close, then one little mistake put you so far away.

Malinvestment doesn’t happen by accident. It requires a big-time government screwup. For example, the Fed might keep interest rates below their natural market level. Or the U.S. Congress could create subsidies, provide loan guarantees, or for political reasons try to steer investment toward chosen sectors. Whatever the specific trigger, incautious investors wind up getting a big portion of their net worth blown away.

I’m not talking about certain behaviors that appear self-destructive at first glance. For instance, venture capitalists (“VC”) expect that 75% of the startups they invest in will never return any cash. They figure on losing 100% of their money on about one-third of their endeavors. But upon closer examination, VCs are acting rationally. They earn highly attractive returns – 10x to 1,000x their capital outlay – on around 10% of their investments. These huge gains offset their losses on the vast majority of their deals.

Ill-advised government behavior – such as artificially low interest rates – allows for objectively irrational activity, even without the benefit of hindsight. A classic case is the colossal overinvestment in movie-theater construction in the 1990s.