Is the stock market just one big pyramid scheme (for the most part anyway)? Is it really any different than the beanie baby craze or even tulip bulbs for that matter? In many ways it seems like the exact same thing.
When you make an investment you expect to generate a return on your investment. Most people start a business when they have an idea they think will satisfy a market demand and turn a profit. The goal of a business is to generate an ongoing positive cash flow from the initial and on-going investment or maybe just a one time gain if the initial exit strategy is to sell out. Whenever business is sold, it is being sold to someone who is buying a future cash flow. The business is valued based on current assets and at least in part on the future cash flow the buyer of the business will receive.
When you buy a stock you are buying a [small] stake in ownership in a company. If the stock is one that pays dividends then you may be making a smart investment and buying a future cash flow. It’s very similar to buying a bond or CD to receive the future cash flow of yields or interest.
Now let’s say you buy a share of Google stock. When you buy Google stock, you are buying a piece of a company that makes a lot of money but does not return the money to shareholders in the form of dividends. You may have some claim to assets if the company goes out of business but any value of those underlying assets will normally be a small fraction of what you actually paid for the stock. In addition, you’ll be at the back of the line to trying to collect your tiny piece of those assets if Google should go out of business.
If you are not buying a future cash flow when you buy Google stock, then just what is it you are buying? Why would you buy it? What would cause the price of the stock to go up? It is an interesting question if you really think about it. If the price of Google stock is $400 per share and you buy 100 shares, then you’ve “invested” $40,000 in Google stock.
What do you get for your $40,000 Google stock investment?
You get a piece of paper (if you are lucky) that says you own 100 shares of Google stock.
You can go around and tell everyone that you own 100 shares of Google stock.
What don’t you get when you buy Google stock?
You don’t get any cash flow from your $40,000 investment.
You don’t get any utility from your $40,000 investment.
You can’t drive it, you can’t eat it, you can’t have fun with it.
You can’t derive any utility from it other than being able to tell people that you own 100 shares of Google stock.
What makes the value of your Google stock go up or down?
Your Google stock value fluctuates based on what people think it is worth. That worth or perceived value is based on how much profit other investors in the marketplace think Google will make and how much they want to be able to say they own one or more shares of Google stock. Other than the satisfaction of owning a share of Google stock, other investors don’t derive any value or utility from owning Google stock either.
Given that most stocks do not pay dividends, how is investing in the stock market different from any other pyramid scheme, bubble, house of cards or ponzi scheme? You get no utility out of owning a stock that does not pay dividends, you can’t use it for anything and any increase in value is based solely on another fool betting that there will be another fool in the future willing to pay even more for the same stock. Hmmmm, sounds like the housing market that turned everyone into “investors”. It is a great way to create imaginary wealth up to a point but at some point the house of cards comes crashing down. Want to get rich or even just have a chance at a secure retirement? Buy or start and run your own profitable business. There is not likely to be another way to do it in the foreseeable future.
