'Why I Think Non-Dividend Stocks Are A Ponzi Scheme'

Feb. 27, 2019 10:17 PM ET80 Comments4 Likes
Robert Kientz profile picture
Robert Kientz
2.79K Followers

Summary

  • Stock investments without dividends are valued only by what the next investor will pay for it.
  • The daily volume of stock trades amounts to about 1% of the total market. Price changes on 1% of trades do not set a real, defensible market value.
  • Market Capitalization is an opinion on value based upon a relatively small volume of trades, and does not represent confirmed cash value for companies.
  • Finding true stock market value may result in painful changes in stock prices that would negatively affect many investors. As a result, legal and accounting changes are not likely to occur quickly.

The Stock Market Ponzi FactorImage Credit

I interview Tan Liu, author of the Ponzi Factor.

Why Non-Dividend Stocks are a Ponzi Scheme

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.

This article was written by

Robert Kientz profile picture
2.79K Followers
Author of DropShadow and founder of Gold Silver Pros @ goldsilverpros.com.August 6-7 Virtual Precious Metals Summit:  https://goldsilverpros.com/namms2020/I have been analyzing the precious metals markets for over 10 years, and have built relationships with many experts in the field which include miners, geologists, and analysts. My site is dedicated to providing you professional research on the precious metals market.I have spent over 20 years working in the technology sector as both an IT and information security professional. I have a Masters degree in Information Assurance & Security, a Bachelors in Business with an MIS concentration, and an Associates in Applied Sciences in Unix Administration and Cisco Networking. I began my investing career over 16 years ago while completing several investment advisory exams - Series 3, 6, 63, and 7 covering the commodities, insurance, and stock markets. After watching the 2008 recession calamity, I began deep research into the economy and markets where I found solace in the writings of Austrian economists whose theories accurately predict and analyze the issues surrounding currencies and financial crises. I then wrote a book, based upon my own extensive research, entitled Dropshadow: The Truth About the Economy, which is available on Amazon.Shortly after writing the book, I began writing for Seeking Alpha and other online outlets on economic and financial topics and issues. I have focused my market research writings on Seeking Alpha since 2018.In 2018, based upon my deep research into the precious metals, I launched my personal newsletter service for investors @ www.goldsilverpros.com where I provide precious metals investors with research updates and insider intelligence in order to help them better invest in those markets.
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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.

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