Mark Cuban, Is the Stock Market Still for Suckers?

In my professional day life I'm an investment advisor. By way of disclaimer, this post is not intended as investment advice in any way shape or form. Past performance is not indicative of future success, blah, blah, blah, etc.

"I've said a lot of this before. The stock market is by definition a ponzi scheme. As long as money keeps on coming in, then there is someone to take the stocks from the sellers. If the amount of money coming in is reduced, the stocks, indexes, et al go down. What if, for who knows whatever reason, the amount of money going into stocks declined significantly ? Who would buy stock from the sellers. I mean goodness gracious, you could see something disastrous happen. Like the Nasdaq dropping from 5000, to under 2000 in just a few years. It's happened before, it can happen again."
Mark Cuban, January 3, 2006

Two years ago in post titled "The Stock Market is for Suckers," Mark Cuban responded to comments I'd made suggesting that over long periods of time the stock market was a superior investment to cash equivalents. 100% of my long-term retirement plan assets are invested in buy and hold equities.

More from Cuban: "Wall Street has done an AMAZING job of creating conventional wisdom. "Buy and Hold " is the 2nd most misleading marketing slogan ever, after the brilliant "rinse and repeat" message on every shampoo bottle. We as a country have fallen for it. Every message from every marketer of stocks tell us. Young or old, if you can hold for the long term, things will work out for you.

That is total bullshit. It's for suckers."

So in the spirit of agreeing to disagree, two years ago I decided to keep track of how two investors who followed Cuban's advice or didn't follow his advice would have fared. Each year I'm going to continue doing a recap of how a hypothetical $100,000 investment would have faired between Cuban's advised cash investing vs. investing your money in the Vanguard Total Stock Market Index (VTI), a low cost no load equity mutual fund.

Mark, if you don't think the stock market is for suckers anymore let me know.

Last year was my first annual recap. For last year I tracked how a 100,000 investment would have fared in the Vanguard Prime Money Market fund vs. The Vanguard Total Stock Market Index. The results for 2006? 100,000 invested in cash (as Cuban advised) would have grown to $104,882.60. $100,000 invested in the Vanguard Total Stock Market Index would have grown to $113,890.00.

So what happened in 2007?

Well, assuming you continued using the same two funds (i.e. buy and hold). The ending value from January 2, 2006 to December 21, 2007 using the Vanguard Prime Money Market Fund [VMMXX] would have returned $110,280. Not a bad return for your $100,000 in two years... perhaps....

Had you invested the same $100,000 in the Vanguard Total Stock Market Index [VITSX)] over the same time period you would have grown your $100,000 into $122,130.

So the question is, if for the last two years you'd dismissed Cuban's "stock market is for suckers" advice and netted an extra $11,850 on your investment does that still make you a sucker?

Cuban says that by skipping the stock market you'd have slept like a baby. But at what cost? Is it worth $11,850 over the past two years to have slept like a baby. Personally 100% of my retirement assets are in stocks (I'm 39 and have a long time until retirement) and I slept just fine the past two years.

Another part of Cuban's argument seems to rest on the fact that investing is confusing and Wall Street only makes it more so. But following a simple strategy of buying low cost diversified index funds does not have to be confusing at all.

Will 2008 be the year that vindicates Cuban in his great "stock market is for suckers" post of 2006? Who knows. But let's come back here in January 2009 and check it out. Between now and then with a historically low P/E ratio on the Standard and Poor's 500 of 17.53, I'm sticking with my long term buy and hold strategy.

Of course what do I know, Mark Cuban's a billionaire and I'm not.

Comments

[riskomatic]

Dear Sir
As many stock commentators and investors you are ignoring a key ingredient: risk. Returns alone are not sufficient to compare two investments. Risk adjusted return is. Not sure what the risk of the investments are but typically the risk of US equities is at least 2.5 times riskier than "traditional"... fixed income ("enhanced money markets" not whitstanding). So if both the portfolios returned 11K, would you have said that they were equal?

[Malkiel]

You've got to be joking, man, to talk with such bravado when the market activity of the last 2 weeks has probably wiped out all your gain. I'm familiar with the general argument you're making, and I've read other analyses of that argument in the past that pointed out that WHEN you buy will affect your results. People that bought before the 1974 recession were probably dead before their share prices recovered 2 decades later. If you're really going to beat your chest on the eve of a recession you're going to be eating a lot of crow in Jan. 09, if you even dare to come back here to bother explaining why you're in such a deep hole...

[kurt walter]

Funny, Mark made his money because of a public company... He was part owner of broadcast.com that was bought out by Yahoo. He got Yahoo stock and sold to people that were willing to buy. At this point, with a few billion bucks, Mark can just buy t-bills and sleep fine. It doesn't matter for him anymore. He has plenty for the rest of his life. But in reality he made his money by growing a company and selling. Well, us mortals must invest money in businesses that are growing and paying out higher dividends year after year to hope to create real wealth. A 100% T-bill portfolio isn't good enough. The easiest way is thru the stock market. It is a fantastic system that anyone with half a brain, lives a little below their means and consistently invests money in growing companies can become quite wealthy over time.

[wallyjm]

i retired in 1986 and received a lump sum of $200500 which i gradually invested in stocks which over the years ran up to over one million. then fluctuated over many years to date. i've lived very well in that time. i've never had any debt whatsoever. new bmw,paid cash for my condo on the beach.and today still have $600000 mostly in etf's. worldwide stocks and out of u.s. dollars. have other currencies,etc.gold. i'm 87 now what would i be worth now if i had bought bank cd's with my $200000 lump sum pension buyout? yes i spend a lot of time on my i-mac computer and constanly research all my investments. people who finance everything and pay lots of interest are living a fools life with and are living a form of slavery!

[billb]

Well done Wally!

[SmartGuyStocks.com]

Wally, you are the man.

[Logical Extremes]

riskomatic makes an excellent point about risk/return. The other significant issue not mentioned is time horizon. With 15 or more years time horizon, stocks are the place to be. Shorter time horizons typically should involve more conservative portfolios (more bonds, some cash, etc). There will, in all likelihood, be years when the stock market loses money (but there is NO way to know when up front). But in the long run, buy and hold mostly in stocks is the way to go.

[coldcut]

With the help of Plunge Protection Team that can print/dispatch money whenever and wherever is needed ( www.telegraph.co.uk/mo...) It's a bit like having a game with steroid-boosted players, there's no way to tell who the real winner is.

[blah-blah]

Ignore the bears, stocks are the only way to go. Those who lose money panic and try to time the market. Increasing dividend payments only make the strategy that much more sound.

[Georealist]

Mark Cuban is for suckers..a loud mouthed ill-infirmed boor..who has supported the most despicable political causes..embarassed himself in front of NBA crowds..and remains..at heart..a second rate pimp who made a lot of money. There have been more than a few.

[juiceman]

The current market only sports "a historically low P/E ratio on the Standard and Poor's 500 of 17.53" if one thinks stock market history begain in 1995. If you look at Jeremy Siegel's historical data series in Stocks for the Long Run (3rd Ed, p. 96), you'll see that the historical average P/E is 14.5.

[schnickelfritz]

Funny that Mark Cuban would besmirch the same vehicle that provided him the economic tools to act like a self-indulging idiot. It's difficult for the likes of Mark to accept the facts when the facts don't support their loony political positions.

[EffHugh]

Additionally that 17 P/E is not going to remain there as corp. profits start falling dramatically as the evidence is showing quite dramatically that the consumer has finally run out of rope. Time for the fed to blow another bubble. Hmm.. let's see... stocks are shot, housing is wrecked for at least 5 years, next up on the bubble train express... PMs and commodities? But what the hell do I know... I'm not a billionaire or even a millionaire... just a lowly hundred thousandaire.

Wonder if the pending bankruptcy of MBIA, Ambac, and Countrywide will put a little damper on the 2009 rendition of this article.

Best of luck to you all, I've been locked into Gold since $400 and short housing and financials since 2005. I really wish I could find a reason to be long the market. Maybe if I just did buy and forget but I can't do that :-)

[Medwickr]

Cuban is of the same ilk as that other idiot. Chaves, egomaniacs.

[Toto-13]

An impressive article bound to shake the foundations of financial theory and advances in... basic arithmetics. The world will no longer be the same after this insightful conversation and I dare you to ask the same question..ah.. backwards to Mike Cuban for more encompassing suspense. :)

[fxtrader07]

Cuban proofs the point that it neither takes common sense nor intelligence to get rich. sometimes, all it takes is opportunity - plain luck to be at the right place at the right time.
Those who are not that lucky could make up through work and saving. yes, saving. but not by buying t-bills, long-term, but instead fundamentally sound companies paying consitents dividens or reinvesting their profits wisely.
anybody talking of "risk-adjusted&qu... superoir profits thorugh t-bills as compared to stocks should please, define the risks first. For both investments - and all of the risks involved.

[marlow4]

The stock market is not a ponzi scheme because what is being bought has inherent value, completely divorced from the stock exchange.
Philosophically, one might question the idea of 'inherent value', since we can't be sure that other people will continue to find value in owning an oz. of gold, a parcel of land, or partial ownership of a company. But realistically, the odds of any of those things being considered valueless by the society we live in are pretty much nil.
As long as there are people who want to own money-making businesses, there will be money in the stock market.

[mythbuster]

probably Mark was a bit disappointed about his investment in mamma.com, but that is no reason to call the whole market a ponzi scheme

[mythbuster]

probably Mark was a bit disappointed about his investment in mamma.com, but that is no reason to call the whole market a ponzi scheme

[Larry Teller]

I totally agree with Cuban that picking stocks is confusing (and challenging). But for those of us who enjoy actively investing, this beats ETFs. The key is managing risk with a diversified portfolio. I get solid ideas from vestopia.com, where investing pros show their own trades and comment on why they buy or sell.

[EffHugh]

In theory you're right that stocks should be a great investment long term and risk adjusted but the problem is that most of that historical return everyone likes to point to in the market was provided by dividends. Don't look now but dividends on US stocks, for the small fraction that actually pay them, are near or at all time lows I believe (I can't substantiate this claim but I remember reading it and inherently it doesn't seem out of line).

Cuban was right on when he said that most stocks are like baseball cards. GOOG is a baseball card. It pays no dividend and doesn't have any inherent value to its holder other than the desire for another person to own GOOG's rookie card. As a result what you have left is an investment that's subject to the manipulation of much larger players in the market which is 90%+, I'm guessing, of the money pushing things around everyday in the market. And at the end of the day if GOOG goes back down to $100 what do you have to show for your "investment"... Nothing because the insiders and Wall St. crooks have taken all the value and provided nothing back to shareholders. That's not an investment that's a craps table. Give me a 7% dividend on a stable growing company whose stock price goes up steadily 5% a year or so who doesn't feel the pressure to continually seek out unwise risk in order to grow profits and I'm there (as would everyone else because there is no such thing that I've seen)

The market is a rich man's game and anyone playing it that doesn't realize that is only fooling themselves. You may get lucky by being in during the right timeframe when bubbles are being blown like in the last 20 years but why do you think so many people bailed on stocks and moved into real estate? Because it's inherently obvious that most stocks have become too expensive. I wonder what Benjamin Graham would think of today's market.

America's about to have a rude awakening. We've now blown the one thing that has allowed us to live so wrecklessly.... the most stable, strongest, and the least corrupt financial system. That's being tossed out the window as we speak along with the dollar. Nobody believes the rating agencies anymore and nobody wants to buy our overpriced, non-dividend paying stocks in a currency that's getting riskier by the day.

[kurt walter]

Cuban' advice is worth the amount of money you paid to read it -- zero.

[Sean Olender]

Stocks are a great investment during a period when 401(k) plans from the 1980s to present were sold as "pre tax" retirement vehicles to baby boomers. It is hard to say where it will go from here. Mark's observation about the Ponzi scheme aspect is somewhat true for sure. The new money coming in props up prices. It's not just "great companies creating value!" It is the default money pouring into stocks through retirement plans and other sources.

The way I see it is the entire 401(k) system is viewed by the Federal Government and the corporations that rely on its tax and spend power for billings - they view it as an account receivable. It is reasonable to assume that current tax rates will not be sustainable unless the US government defaults on its obligations to lots of people. They already spent $2 trillion out of the social security trust fund that people paid to social security - they used it for general fund tax expenditures like war and they are going to double tax the same people who paid in to pay them back reduced benefits. That's the biggest regressive tax scam in history.

Additionally, an incredible amount of money is pilfered from the stock market by brokers, dealers, and firms that control things. Look at the spread between bid and ask prices on call and put options. It's incredible - like sometimes 10% or 12%. Look at mutual fund "management" fees. Look at firms like EverBank that provide a "New Zealand Dollar Denominated CD" at an interest rate of 6.75%, which is great except that actual banks in New Zealand are offering 8.8% and EverBank probably keeps the more than 200 basis point interest rate spread as profit. Now there's nothing wrong with profit, but there is an awful lot of profit built into the ethereal investment markets in the United States - enough where the people running that are more likely to be heading to dinner on a private Lear Jet than most of their investors.

The timing is also hugely important. Look at the NASDAQ today? 2,500? It was at 5,000 in 2000 and here we are almost eight years later. Inflation losses are also not usually considered when figuring stock market gains.

The whole economy is wired to make it tough to deal with things here because they inflate the money supply and credit to produce a constant positive rate of inflation that is difficult to accurately measure and is hugely misreported and then they tax you on capital and income gains from interest and capital gains including the amount that just made up for lost purchasing power from the inflation that they cause and control. That's quite a racket. It goes at least a little ways in explaining the savings rate here and the huge consumer and mortgage debt. It makes borrowing lots of money feel smart and saving money seem quite risky.

[clem]

I don't think Cuban's point was addressed in this article. Cuban is saying the stock market, regardless of whether he and others have benefitted from it or not, is a ponzi scheme that could crumble if or when everyone realizes that it is a ponzi scheme. Simply showing that the stock market has beaten the return from ammoney market over the past 2 years does not address Cuban's point. Cuban isn't arguing that returns on stocks aren't better than returns on cash. In fact, his point reminds me a bit of Burton Malkiel's "castles in the sky" he write about in "A random walk..." This article's author is beating up a strawman and is neglecting the logic of Cuban's idea, however vaild or hair-brained it may be. Full disclosure - I am one of the idiots heavily invested in the market.

[EffHugh]

S. Olander you hit the nail on the head. Your summary can be taken further to say that our "system" encourages debt and discourages storage of wealth. The reason is because people that don't need the money aren't good employees and we certainly can't have that can we? If the current system wasn't so rigged with so much money funneling to the upper echelon we'd all be working 20 hour weeks by now with the productivity gains that have been had. Just think about how much easier it is to do nearly every job yet we are working more than ever for increasingly less. The revolution will not be televised :-)

[User 134242]

Pity the person who uses this guy as an "investment advisor".

[Texrat]

How would this article have gone if 2007 had lasted a few more weeks? As one poster noted, a l,ot of gains are being erased as paranoia (and sanity) seep in.

It's easy to crow when the wind blows your way, but we all know the market is just as fickle. Had the banks and fed not propped up the housing (market of) cards last year, Cuban would be getting the last word.

[kowalski]

Wall Street: Always an insider's game

www.post-gazette.com/p...