I interview Tan Liu, author of the Ponzi Factor.
We discuss why stocks that do not pay dividends are a Ponzi system. In a Ponzi system, the only way investors make money is to sell their shares to someone else who think it is worth more. But the valuation is based upon an opinion of the stock’s value and not distributions of actual profits.
Without dividends, there is no real value conferred from the company to the stock holder. And if a new investor cannot be found who is willing to pay more, then the stock is not worth much more than the paper it is printed on. When the next investor holds a different opinion of value, the stock price goes down. But nothing about the stock actually changed.
We also discuss why the argument that stock owners can vote is window dressing. It does not actually allow individual stock holders to run the company, because companies can issue more stock any time they want. This amounts to printing paper with no real returns whenever the company needs more money. And this dilution effectively prevents individual share holders from being heard or instituting real changes.
Further, Tan discusses his experience at two hedge funds and the rules that allow companies to legally misrepresent their actual investment value. The investors in these type of companies are harmed because they will likely not get paid back full value on their investments. And because the process is legal, the owners of these businesses are often not penalized or convicted.
We also discuss the value of current valuation methods used for stocks and their options. These include Net Present Value, Market Capitalization, and Black Scholes. Further, we discuss the accrual accounting method used to facilitate inaccurate asset valuations.
Lastly, and perhaps most importantly, we discuss solutions to the current challenges with stock valuation. Implementation of the solutions may result in pain for current investors. As such, we discuss the chances the changes will be made and in what cases those changes are likely to occur.
You can find the Ponzi Factor book, with Tan's research as discussed, on Amazon: The Ponzi Factor Book.
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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.