The stock market is a Ponzi

[MadoffIsAGenius No.250831]

ITT we debate whether or not the stock market is nothing more than a giant Ponzi that never fails to find new "investors."

In order to profit off the stock market, you need to have more fools down the road who are willing to contribute their money into this giant Ponzi, thus driving up stock prices and making the Ponzi grow even more. At some point, the economy slows down and eventually less money will flow into the stock market. This is when the giant Ponzi begins to fall apart and the market crashes, wiping out all new investors' wealth while still letting older investors profit.

If all stocks pay dividends and trade in narrow ranges like currencies then I would be more hesitant to call the stock market a giant Ponzi but we all know that many stocks don't pay dividends and they fluctuate/bubble like no tomorrow.

[Anonymous No.250841]

Some companies also buy back shares instead of paying dividends. This pays back the investors in a similar way, since it drives up the price.

Share buybacks are often preferred to dividends because they don't get taxed twice.

[Anonymous No.250845]

>bears and bulls circled at prints on the wall

[MadoffIsAGenius No.250848]

>>250841
Ok, so the company acts as the new fool down the road who'd come in and contribute new money into the Ponzi which then further inflates the stock's price and attract even more newer fools to come contribute their money.

[Anonymous No.250849]

>>250831
A stock's intrinsic price is the present value of all future free cash flows. As companies become more valuable in terms of future cash flows, the stock price must increase as a natural result of supply and demand. It is actual value which drives the stock market first and foremost.

Further to this, a company should pay dividends unless it has no positive Net Present Value projects which will allow it to reinvest its earnings for an economic profit.

Does this mean what you are describing doesn't occur? Certainly not. Companies come and go all the time. Bubbles form and pop as irrational greed takes over. However, it is most definitely not a ponzi scheme. Companies that do not produce value do not last long.

[Anonymous No.250855]

>>250848
It depends on the stock. If the company has assets greater than its liabilities, the stock has a real value corresponding to things with real value. Some stocks bubble. But most stocks would have a real value even if nobody else was willing to buy them off of you.

[MadoffIsAGenius No.250865]

>>250849
Not arguing with you about the fundamentals behind stock valuation, it's common knowledge. However, think about this: how the fuck do you know for sure, with 100% certainty, that a company will certainly provides positive net cash flow all the time in the future? You don't. Even a giant like Microsoft will have to go some day, maybe a hundred years from now, but it will happen. So then why so people still buy Microsoft's stock? Because they BELIEVE in the PROMISE that the company will continue to grow and generate positive earnings and increase the stock's value before they die. This is the same BELIEF in a PROMISE of 20% return or more of Ponzi schemes. Just because a Ponzi scheme's lifespan is more than 20, 30, 40, or 50 years doesn't make it not a Ponzi scheme. Let's say that Microsoft starts declining in 2051 and will go bankrupt in 2080. If I buy MSFT today and sell it in 2050, I will have profited from the fool who comes in and buy/hold it from 2050-2080. Older investors profit, newer investors suffer. Pure Ponzi.

[Anonymous No.250868]

>>250865

You don't. Risk is already incorporated into and accounted for in the intrinsic value of a company. Surely you are aware of Systematic and Non-systematic risk?

There is a legitimate reason why people diversify their portfolios. People don't just throw around the phrase because it's cool to look like you know what you're doing.

Or maybe they do.

[Anonymous No.250870]

>>250868
What's the difference between systematic and non-systematic risk?

[Anonymous No.250871]

>>250865
>>250868 here

It's a ridiculously broad claim to pain every single stock market company with the same brush and call them a ponzi scheme. You might as well say any business enterprise that attempts to attract investors is a ponzi scheme in that sense, even one that you start yourself.

A Ponzi scheme would imply that businesses, or the stock market, needs investors to pay existing investors. This is completely false. Perhaps it's true for some if they try to ride stock market bubbles, but at the end of the day the data simply does not back up your hypothesis.

[Anonymous No.250872]

>>250870
Systematic risk is Market risk. It's the volatility that the entire market faces. If you held a diversified portfolio of all risky assets, the volatility of returns on that portfolio would be systematic risk.

Non-systematic risk is firm-specific risk. It is the volatility and risk that a single, individual firm, organization or entity faces.

[MadoffIsAGenius No.250878]

Ok, I'm wrong. You're right. Thread closed lol in my logic, which I now understand is illogical, investing in real estate, or anything else for that matter, would also qualify as Ponzi, which is untrue.

Glad that I was wrong. I was starting to have a moral conflict trading stocks lol

[Anonymous No.250880]

>>250872
Ah I see, so it's possible for both risks to exist at the same time. Both affect the investor.

>>250878
Please explain, I'm still confused

[Anonymous No.250881]

>>250831
the stock market is prone to bubbles but it is not a ponzi scheme since many stocks pay dividends or buy back stocks

[Anonymous No.250884]

>>250880
Basically, yes. Look at it this way. If you were to take a sample of a stock's daily returns - dividends and capital gains, say for a year, and then take the standard deviation of those returns (standard deviation is the volatility, or risk), that volatility is made up of both systematic and nonsystematic risk.

With diversification, by spreading your investment around over many assets/companies, you pretty much wipe out the effect of non-systematic risk. This leaves you with only systematic risk, which can never be diversified away.

Some people however like to be exposed to non-systematic risk for the potential gains it can bring, such as investing heavily in a start-up or growth company. It's certainly more risky, but can grant much larger rewards.

[MadoffIsAGenius No.250888]

>>250880
To summarize, every investment pretty much requires new investors to pay old investors, which make all investments "Ponzi" in nature. However, a true Ponzi only moves money around, generating no real extra value. If an investment contributes real extra value into society, it isn't Ponzi. Some stocks are Ponzi because they are hyped up bubbles based on nonprofitable companies but that is not true for every company that has stock.

So I guess my original hypothesis was half right because half of the market (pure estimate here, don't quote me) is made up of stocks from nonprofitable that won't ever be profitable but the stock values are hyped up and still increase for no good reason. Those stocks are the Ponzi ones.

[Anonymous No.250893]

>>250888
As I said originally, there are without a doubt times of market hysteria where investors go crazy looking for whatever return they can scrape up. The best thing you can do in these times is protect yourself by diversifying and be comfortable performing due diligence on companies that you might want to invest in.

[MadoffIsAGenius No.250895]

>>250893
Besides buying into indexes and well-diversified funds, what criteria do you look for before buying stocks to make a well-diversified portfolio to minimize nonsystematic risk? I know that you have to buy into different industries but what else?

[Anonymous No.250898]

>>250895
As a note, if you're looking to minimize nonsystematic risk then stock-picking is going to be opposite to your goals. If you're participating in stock picking then you're basically looking to adopt firm-specific risk for the additional returns it might bring.

With that said, analysis of financial statements and understanding the signals that financial ratios can show is a good start. You can also look into what the company's primary business is and how well it performs in that regard.

For the most part, stable companies will have stable financial ratios (or a justification for an otherwise poor ratio) and stable financial statements. However, financial ratios are only relevant when compared to industry averages, so don't make the mistake of comparing it to a market wide average.

However, for an individual, this kind of research might be a bit much. Typically it'd be done as a day job for analysts. You could always look up third party financial research (or multiple third-parties) and see if there is any consensus.

[Anonymous No.250926]

>>250831
>papers on the back wall
>"Bear" and "Bull" with circles
Holy shit I just lost it.

[Anonymous No.250930]

>>250895
> I know that you have to buy into different industries but what else?
Different regions of the world, different types of investments (stock, bonds, real estate etc.)

[Anonymous No.250960]

>>250831
>The stock market is a zero sum game!
NO it's fucking not.
A. Fundamentals change. Profits increase, companies grow and shrink, and the market reacts to the change in fundamental value of the underlying security.
B. Dividends and buybacks make it -not- a zero sum experience. Money gets pumped into the market by the companies themselves. To the tune of billions of dollars for big blue chips.

[Anonymous No.250965]

This is the dumbest thing I've ever read.

[Anonymous No.250987]

>>250865
>Even a giant like Microsoft will have to go some day, maybe a hundred years from now, but it will happen. So then why so people still buy Microsoft's stock?

In the long run we're all dead. So why do you create this thread?

Also: The older investor who profited from his Microsoft shares might reinvest the money into another company. Some fool already owns shares in this company and makes 800% profit. He sells. 10 years later the company goes bankrupt and the Microsoft investor loses his investment. Where is your Ponzi scheme now?

[Anonymous No.251008]

>>250831

short everything then nigger