Saturday, July 7, 2018

Re: Book - "he Ponzi Factor" by Tan Liu

On Sat, Jul 7, 2018 at 3:01 AM, KEVIN KEYES wrote:

  My brother lent me a hard copy of the book "the Ponzi Factor" by Tan Liu that states the stock market is a Ponzi Scheme, the data in this book is compelling and disturbing.  It is a quick read, interested in your view point.


I made this argument before without firmly believing in it.  

My rationale is that when a company issues stock, people give them money, and the company gives them pieces of paper representing ownership in the company.  The paper itself has no inherent value, it is only what the paper represents that has value.  Companies that issue dividends have some inherent value, but not all companies issue dividends.  Unlike the first publicly traded stock, the Dutch East India Company, you can't sell that stock back to the company for money.  Eventually the Dutch East India Company discontinued this practice, and you could only get value out of the stock by selling it to other people, just like today's stock market.  So like buying and selling antiques, the value of your holding depends upon somebody else's willingness to buy it.  In the antique business they call this "the bigger fool theory."

Of course, money only has value based on people's willingness to exchange goods for it, so the value of any financial holding is dependent upon other people.

What is the ultimate fate of the stock you own?  The Dutch East India Company went out of business 198 years after they first issued stock.  Apple is doing really right now, but what are the chances that they will continue to do well in perpetuity?   Eventually corruption or mismanagement will cause the company to go into decline.  (I think that this could already be happening.)  At some point it will either go out of business, or be bought out by somebody else.  For example, in the early 1980's Atari was at the top of their game, but after the video game crash of 1983 they nearly went out of business, and what little is left of the company has several times been bought and sold by other companies.

​So it seems to me that the value of our stock is temporary ​and depends upon a number of factors including the economy doing well.  I think that everybody hopes to sell their individual stocks before the inevitable decline.  However, the stock market as a whole has been a proven winner, and there is safety in diversification.