Tan Liu: Why Many Of Todays Most Owned Stocks Are Ponzi Schemes
Tan Liu: Why Many Of Todays Most Owned Stocks Are Ponzi Schemes by Adam Taggart for Peak Prosperity
Too much phantom wealth vs cash flow
Stocks provide a return to today’s investors via two mechanisms: dividends and capital gains.
Dividends provide and income stream which can be quantiatively values. Capital gains result from speculation — an expectation that future dividends will be higher than the market currently expects.
But what’s the value of a company that continuously pays no dividends and does not appear as if it ever will in the foreseeable future?
Former financier and current statistician Tan Liu, author of the recent book The Ponzi Factor: The Simple Truth About Investment Profits explains how many of today’s perpetually dividend-less companies traded on the public market are operating as ponzi schemes by definition.
As a result, a substantial amount of the market capitalization of our stock market is actually “phantom wealth” that doesn’t truly exist. It will vaporize during the next financial crisis as investors proiritize cash flows in-hand over the promises of starry-eyed CEOs:
When it comes to stocks, there are two ways of making money. There are capital gains and there are dividends.
In the case of dividends, there’s nothing wrong with those, because they comes from the profits of the underlying company itself.
But the issue is with capital gains, the whole buy low/sell high gamble that’s promoted 99% of the time on CNBC, financial news networks, and is also the focus of a lot of financial research.
The issue with capital gains is that they come from other investors. When one investor buys a stock for $100 and then sells it for $110, that extra $10 (or actually the full $110) they’re getting is not coming from the company. It comes from another investor, who will then need to sell it to yet another investor.
So when one person buys low and sells high, another is also buying high and needs to sell for even higher. And a system where current investors’ profits are dependent on cash from new investors is by definition how a Ponzi scheme works.
What’s wrong with that is a lot of stocks don’t pay dividends and why are you an owner of a company if the company never pays the so-called owners?
that’s exactly how it works because when a stock doesn’t pay dividends, there is no monetary connection between the revenues and profits of the company and the actual shares.
And the only thing that’s really increasing is just this Ponzi process of one investor trading money with another investor. And it’s fundamentally different from the money itself that investors ultimately want. No one actually wants to buy stocks and say hey. I don’t ever want my money back. I just want stocks and I want to watch that value grow. And I never want my money back.
Wrong. Everyone wants their money back. Because a stock is essentially completely worthless unless you can get your money back. And every investor that buys stocks wants more money than they contribute.
But if investors are the only ones contributing money into the system, how on earth can they all make money from it? That’s really the bottom line. A stock without dividends is really just a Ponzi asset and there is no monetary connection to the company.
So therefore, it’s not a real equity instrument at all and furthermore, we can see this because some people say oh, well stocks are real property. How can it be real property if literally companies can print this stuff like toilet paper at any time they want? Real property takes time to replicate.
People forget that the reason why stocks were equity instruments to begin with is that they all pay dividends, according to history. Before the 1900s, all stocks paid dividends and there was a monetary connection between the shareholders and the companies that they owned.
That’s how stocks were supposed to work. It was supposed to be that simple. You buy a piece of a company; it makes money; you make money. But that’s not how stocks work now. This idea that stocks can literally have no dividends and these companies can make billions and never pay dividends indefinitely.
Or that these companies can continue losing money and keep printing stocks? In the case of Tesla and many others, this is a new concept that came out over the past 100 years or so. So the way that stocks work now is fundamentally different from how they actually were designed to work and how they worked before the 1900s.
And a stock without dividends when there is no monetary connection to that company should never be seen as an equity ownership instrument.