Are Stocks a Ponzi Scheme?

[marko]

+1

What's more important is whether the dividend-paying company makes enough profits to pay the dividend and still have enough leftover to sustain the operation.

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There's a number of different websites where you can determine the dividend payout ratio. Dividend payout ratio is the amount of dividends paid vs net income. From there you can often glean how stable the dividend is. I find it useful for some of the more obscure stocks but staying with the old faithfuls is generally a better route.

 

[RetiredAt49]

Having worked (in leadership positions) for several of the S&P 500 companies over the last 20+ years (as well as some mid and small cap companies), I can tell you that EVERYTHING publicly traded companies do is based on one primary objective… “what do we need to do to increase revenue and make our shareholders happy/richer - which includes our executives and our employees”?

This is especially true in every S&P 500 company I’ve worked for or spoken with, which is why a huge percentage of my NW is in VOO.

People who think the stock market is a Ponzi scheme do not truly understand that you are buying a portion of each company you invest in…. And let me tell you the big companies are laser focused on ensuring that their shareholders (which include themselves) are gonna get the best long term benefits of holding those shares of stock.

Most of my compensation and the reason why I was able to retire at 49 was due to companies granting me shares of stock in their company.

 

[Car-Guy]

^^^^^
In my day, I worked for 2 of the fortune "10" companies. Profits, stock price and share holder dividends where always at the top of their list. Management benefits/compensation was a close second, followed by the rest of the employees... Oh, then came customers and everything else.

 

[NW-Bound]

Stock investing is not a Ponzi scheme. However, there's a thing called a "stock bubble", and that's a different matter.

It's not different than a home having a true intrinsic value, yet a lot of people have lost their shirt (and pants) in a housing bubble.

 

[marko]

^^^^^
In my day, I worked for 2 of the fortune "10" companies. Profits, stock price and share holder dividends where always at the top of their list. Management benefits/compensation was a close second, followed by the rest of the employees... Oh, then came customers and everything else.

Our CEO used to say that "CEO" stood for Customers, Employees and Owners (shareholders). And he meant it!

 

[pb4uski]

Sounds like a good, smart CEO. I've always believed if you took care of customers and employees (who deliver product and services to customers) that the rest would take care of itself as long as you didn't do anything stupid.

 

[Tetto]

Well, to start with, "crypto asset space" is an oxymoron. There are no assets involved. Just the greater fool theory. One of the things that amuses me about crypto is the re-emergence of technical analysis, which has long been discredited and on its deathbed. Why now? There is nothing else for the chattering monkeys to talk about. No assets. No intrinsic value. No financial ratios. Nothing.

We own shares in basically all the stocks in the world (VTWAX). In each of those companies, there are employees working to make money for the shareholders. This money comes to us in the form of appreciated stock values due to the company's money being internally invested or used for stock buybacks. It also may come to us as dividends. It is these people, working away, who are responsible for the steady growth of the stock market. Some companies are more successful than others, of course, but the average is 5+% per year growth. That is why buy-and-hold works.

The point here is that there is new value continuously being created for shareholders and reflected in the market. That is the good that comes from owning a piece of a company. New buyers pay more than existing owners to the extent the employees of the company have added value -- retained earnings, shareholder equity -- or to the extent that management of the company have bought back shares, increasing the slice of the pie that each existing shareholder owns.

++++1

 

[RobbieB]

The primary mission of a corporation is to make money for the shareholders.

 

[Gumby]

The primary mission of a corporation is to make money for the shareholders.

That is one theory; there are others. Specifically, if we as a society are willing to grant limited liability to equity holders (i.e- the worst that can happen when the business fails is that the stock you bought goes to zero, but you are not liable to pay more, no matter how much the company owes creditors) then we may be entitled to ask more of you in terms of the corporation undertaking other missions.

 

[RobbieB]

That's why we have bankruptcy laws.

 

[Gumby]

The concept of limited liability for shareholders of a corporation is independent of the bankruptcy laws. It is created by state law, not Title 11 of the United States Code.

 

[marko]

That is one theory; there are others. Specifically, if we as a society are willing to grant limited liability to equity holders (i.e- the worst that can happen when the business fails is that the stock you bought goes to zero, but you are not liable to pay more, no matter how much the company owes creditors) then we may be entitled to ask more of you in terms of the corporation undertaking other missions.

I suspect you're talking about ESG and such. But I'm not buying the "entitled" aspect.

One should still be free to choose if one wants to participate in ESG type companies and companies should also choose whether to opt into them only if it will enhance profits.

XOM finally gave in to such pressure driven by large shareholders (not that it seems to have made any difference) but a small investor has little voice in these matters.

The thing is, I don't know the first thing about running X,Y or Z companies. How can I tell them what policies to adopt?

If you don't like what they're doing outside of price performance, sell your shares. I buy stocks in order to make money...and I like my Altria and oil dividends!. If I want to change the world I'll send some XOM dividends to a homeless shelter.

YMMV

 

[Gumby]

I'm not talking about ESG at all. I am merely pointing out that the modern corporate form provides limited liability to shareholders. It's not a law of physics that things should be that way. It's a societal choice. We could just as easily require all businesses to operate as sole proprietorships or standard partnerships, where the owners are fully liable for the debts of the business.* In which case, I would agree wholeheartedly that the sole purpose of the company would be to make as much profit for its owners as possible.

But, in a world in which I also enjoy limited liability as a part owner of Altria, I'm not so quick to climb up on my high horse about my supposedly ineluctable rights as a shareholder. My limited liability does not currently come with a price tag. But it very well could. That's for our society to decide.


* I am fully aware of the argument that it is necessary to have such limited liability in order to attract sufficient capital for business.

 

[marko]

I'm not talking about ESG at all.. My limited liability does not currently come with a price tag. But it very well could. That's for our society to decide.

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Got it and agree. But that's the rules of the game we're playing right now and I'm sorta ok with it.

Sorry that I missed your point. The "corporate taking on other missions" comment threw me off so I'm not sure what you meant by that.

 

[ERD50]

... I am merely pointing out that the modern corporate form provides limited liability to shareholders. It's not a law of physics that things should be that way. It's a societal choice. We could just as easily require all businesses to operate as sole proprietorships or standard partnerships, where the owners are fully liable for the debts of the business.* ...

* I am fully aware of the argument that it is necessary to have such limited liability in order to attract sufficient capital for business.

I guess I don't see a practical distinction here. If a sole proprietor has debts that are due that exceed their liquidation value - well, as the old saying goes "you can't get blood from a turnip". Bankruptcy would be the normal route. I suppose a person could decide against bankruptcy, if he could get agreement from creditors that he would work the debt off over time? I guess for a large corporation, that's merely "restructuring the debt"?

And in a bankruptcy, shareholders may get a piece of what is left, so not even zero in some cases.

-ERD50

 

[VanWinkle]

"Only buy stocks that are going up, if they don't go up, don't buy them........" Some really smart guy said this!!

 

[OldShooter]

"Only buy stocks that are going up, if they don't go up, don't buy them........" Some really smart guy said this!!

Will Rogers: " Don't gamble; take all your savings and buy some good stock and hold it till it goes up, then sell it. If it don't go up, don't buy it."

 

[Car-Guy]

"Only buy stocks that are going up, if they don't go up, don't buy them........" Some really smart guy said this!!

That's what I do. Problem is I usually buy just about the time it's up at the top... I have a real knack for buying near the top and selling near the bottom...

 

[OldShooter]

That is one theory; there are others. Specifically, if we as a society are willing to grant limited liability to equity holders (i.e- the worst that can happen when the business fails is that the stock you bought goes to zero, but you are not liable to pay more, no matter how much the company owes creditors) then we may be entitled to ask more of you in terms of the corporation undertaking other missions.

Not a new concept, In fact it is embodied in the recent codification of "Public Benefit Corporations." (https://en.wikipedia.org/wiki/Benefit_corporation). I think the jury is still out on whether this is a worthwhile idea or not.

A fundamental problem is "Who decides what is a worthwhile corporate goal beyond profits?"

The government? Governments worldwide have a consistent record of failing at industrial policy.

The corporate owners? What would the crackpot pillow guy consider to be a public benefit? How about the coal mining company's shareholders?

Should the benefit somehow accrue to employees, inevitably making hiring more costly and less attractive. (Looking at you, France.)

Then, of course, there is the issue of retaining customers if doing the "good things" increase costs, hence prices.

Essentially, requiring corporations to provide public benefits in excess of what they need for their own purposes amounts to an invisible tax on shareholders, a tax that is spent by corporate management in any way they choose.

The concept of limited liability for shareholders of a corporation is independent of the bankruptcy laws. It is created by state law, not Title 11 of the United States Code.

IIRC the concept originated in the days of the Dutch East India Company and similar efforts, several hundred years ago.

 

[Gumby]

All good points. My real objection to the statement that "the job of corporations is to maximize profits to the shareholders" is that it begs the question (in the true sense, not the false usage by those who mean 'raises the question') because it assumes the conclusion. It is only that way because our society has elected so far not to require anything else in return for limiting the liability of corporate shareholders. That could be changed, although it probably won't be.

 

[VanWinkle]

Will Rogers: " Don't gamble; take all your savings and buy some good stock and hold it till it goes up, then sell it. If it don't go up, don't buy it."

Thanks OldShooter, I was close.....

VW

 

[Fermion]

That is a good point. I don't think I would invest in biotech if I could be held responsible personally for the next thalidomide.

Imagine a world where you bought 1000 shares of a company, forgot about it, then were sued for most of your personal wealth because that company did bad.

 

[VanWinkle]

All good points. My real objection to the statement that "the job of corporations is to maximize profits to the shareholders" is that it begs the question (in the true sense, not the false usage by those who mean 'raises the question') because it assumes the conclusion. It is only that way because our society has elected so far not to require anything else in return for limiting the liability of corporate shareholders. That could be changed, although it probably won't be.

Most have done very well under the current system. There is a name for changing it so that everyone has a good outcome. I'll take the current system with laws that need to be enforced.

Best,

VW

 

[pb4uski]

I guess I don't see a practical distinction here. If a sole proprietor has debts that are due that exceed their liquidation value - well, as the old saying goes "you can't get blood from a turnip". Bankruptcy would be the normal route. I suppose a person could decide against bankruptcy, if he could get agreement from creditors that he would work the debt off over time? I guess for a large corporation, that's merely "restructuring the debt"?

And in a bankruptcy, shareholders may get a piece of what is left, so not even zero in some cases.

-ERD50

There is definitely a huge difference. For a sole proprietorship if the "business" has negative net worth then the owner's personal assets are at risk whereas if a corporation has negative net worth then the creditors get left holding the bag... that is why many sole proprietorships ultimately incorporate as a LLC or S Corp or C corp... to protect the owner's personal assets from any business exposures.

 

[pb4uski]

All good points. My real objection to the statement that "the job of corporations is to maximize profits to the shareholders" is that it begs the question (in the true sense, not the false usage by those who mean 'raises the question') because it assumes the conclusion. It is only that way because our society has elected so far not to require anything else in return for limiting the liability of corporate shareholders. That could be changed, although it probably won't be.

I think that if a corporation treats its customers and employees fairly, delivers fair value to its customers and compensates its employees fairly that over tlong run the shareholders will benefit... perhaps not each and every quarter, but over the long run... corporations can walk and chew gum athe same time and a myopic focus on shareholder profits to the exclusion of all other things is a sure-fire recipe for mediocrity.

Like many things in life, everything in moderation and nothing in excess applies beyond natural persons too.