Final answer:
High capital gains cannot be assured simply by buying stocks of companies with high profits because past performance does not guarantee future returns, market conditions and competition can change, investor sentiment and market efficiency can affect stock prices, and unpredictable events can impact company profitability.
Step-by-step explanation:
A financial investor in stocks cannot earn high capital gains simply by buying companies with a demonstrated record of high profits due to several key reasons. First, past performance does not guarantee future success. Stock prices often reflect current investor expectations about future performance, which means that companies with a history of high profits may already be priced accordingly, leaving less room for price appreciation.
Second, economic conditions and competitive landscapes change, affecting company profits. High profits may attract more competition, which can erode future profitability. Additionally, market sentiment plays a crucial role in stock performance and can influence stock prices independently of a company's underlying financial performance.
There is also the issue of market efficiency, where it is believed that all known information about investment securities, such as stocks, is already reflected in their prices. As a result, this makes it challenging for investors to purchase undervalued stocks or sell them at inflated prices consistently. Lastly, unexpected events, such as regulatory changes or technological advancements, can impact a company's profitability and thus stock prices, making high capital gains uncertain.