Are Stocks a Ponzi Scheme?

[ERD50]

Well that's the same thing; a discussion we've had here dozens of times.

The trouble is selling shares of stocks that pay no or very low dividends. After you've sold all your shares, that very last share left had better be worth $200,000 and you'd better be on your death bed.

No, that's not a problem at all.The very last share (all else being equal - distributing divs vs selling shares) will be worth a very large dollar amount (though likely split along the way).

I demonstrated this a while back with a spreadsheet. It's immediately obvious before you even finish. If a 4% (for example) div is retained, and you sell 4% of the shares for income, the remaining shares are 4% higher. Rinse-repeat, in either case you have the same income and the same final balance. The money has to go somewhere.

You start with $1M, 10,000 shares, $100/share. Draw $40,000 each year, after the stock has gone up 4% (the retained 4% div) the first year, the shares are $104 now, so you sell ~385 shares. You have 9615 shares left @ $104, which are worth $1M.

Same as the $1M worth of stock distributing the $40,000 in divs each year. It all has to add up, no 'magic dividend money'.

-ERD50

 

[freedom2022]

I think over the past 25 years or so, the stock and bond markets have benefitted from money printing more than anything else. I don't know if that qualifies as a Ponzi scheme, but it sure doesn't seem right that each time the "market" corrects, they have to print more and more money to reverse the fall. This doesn't strike me as a true functioning free market. In 2008, our national debt was about $7T. with less than a trillion dollars on the Fed's balance sheet. Now it is over $31T with another $9T on the balance sheet. That is all debt.

Something doesn't smell right.

I raised similar concern in other thread.
At some point, people will lose faith on treasury and government bonds. The debt is not sustainable.

 

[OldShooter]

... It all has to add up, no 'magic dividend money'. -ERD50

Of course.

​

 

[Car-Guy]

I raised similar concern in other thread.
At some point, people will lose faith on treasury and government bonds. The debt is not sustainable.

 

[marko]

No, that's not a problem at all.The very last share (all else being equal - distributing divs vs selling shares) will be worth a very large dollar amount (though likely split along the way).

I demonstrated this a while back with a spreadsheet. It's immediately obvious before you even finish. If a 4% (for example) div is retained, and you sell 4% of the shares for income, the remaining shares are 4% higher. Rinse-repeat, in either case you have the same income and the same final balance. The money has to go somewhere.

You start with $1M, 10,000 shares, $100/share. Draw $40,000 each year, after the stock has gone up 4% (the retained 4% div) the first year, the shares are $104 now, so you sell ~385 shares. You have 9615 shares left @ $104, which are worth $1M.

Same as the $1M worth of stock distributing the $40,000 in divs each year. It all has to add up, no 'magic dividend money'.

-ERD50

Agree, but my example was stocks with no dividends. I could still be out in the weeds however. Seem to spend a lot of my time there.

 

[ERD50]

Agree, but my example was stocks with no dividends. I could still be out in the weeds however. Seem to spend a lot of my time there.

So is my example. A stock that earns 4% and pays it out in divs, vs a stock that earns 4% and retains that value on its books.

-ERD50

 

[marko]

So is my example. A stock that earns 4% and pays it out in divs, vs a stock that earns 4% and retains that value on its books.

-ERD50

You're bothering me with facts but my mind is made up!!

 

[RobbieB]

Ah, but book value has nothing to do with stock prices which are "subject to speculation"

Meanwhile, the divi stocks just keep on paying the bills.

 

[ERD50]

Ah, but book value has nothing to do with stock prices which are "subject to speculation"

Meanwhile, the divi stocks just keep on paying the bills.

And so do the non-divi stocks.

-ERD50

 

[RobbieB]

But you have to sell them eh?

 

[ERD50]

But you have to sell them eh?

So the div stock has to distribute them, eh?

-ERD50

 

[Robert the Red]

The only actual way you can milk the company is if the company pays a dividend to you for owning the stock.

All of this makes me wonder if the only true investment is a dividend paying stock and all the non-dividend stocks are either a Ponzi scheme or gambling.

For a long time, your "only actual way" was the general principle for valuing stocks (or other types of investments). Any other way was susceptible to pump-and-dump. Only with the advent of regulated securities and accounting methods did the current idea of valuing a company based on its assets and earnings become the norm -- sometime in the 1950s, I think.

 

[ERD50]

Maybe this should be in the "pet Peeve" thread, but it bugs me that "Ponzi Scheme" is used generically for any sort of fraud.

See wiki:

A Ponzi scheme (/ˈpɒnzi/, Italian:*[ˈpontsi]) is a form of fraud that lures investors and pays profits to earlier investors with funds from more recent investors

A Ponzi scheme will blow up at some point. And, there is zero evidence that stocks are making dividend payments, and/or growing their value by distributing funds from the early investors.

There's just no way stocks have been on this run for way over 100 years if it was a Ponzi scheme.

You can run a Ponzi on one person (for a while). Promise 20% safe annual returns on a $100,000 investment. Take the $100K, after a year pay a $20,000 dividend. Investor is happy. Do it again next year. Then take off with the remaining $60,000.

Of course, a real Ponzi operator will drag more people into the scheme, with the early investors telling them it is for real, they get their 20% every year! Come on in, the water's fine!

-ERD50

 

[marko]

Maybe this should be in the "pet Peeve" thread, but it bugs me that "Ponzi Scheme" is used generically for any sort of fraud.

-ERD50

+1

So many misused words...a general lack of context/history/English. (moot vs mute comes to mind)

As they said on the "Princess Bride" : 'I don't think that word means what you think it means'.

Disclaimer: My oft-mentioned grandfather actually met Mr. Ponzi.

 

[almost there]

Pretty much. Need to know when to get in and out.
Or just let it ride and never use it. Claiming victory.
Or bypass it all together in retirement.
Who needs the added drama. "Ain't nobody got time for that".

 

[Montclairbobbyb]

Simply put, NO... Any company is potentially capable of unscrupulous financing practice, but stocks have been providing great financial returns for generations.

 

[youbet]

So is my example. A stock that earns 4% and pays it out in divs, vs a stock that earns 4% and retains that value on its books.

-ERD50

Is it always "guaranteed" that if a company retains the exampled 4% that the stock will increase by 4%? I've observed companies cutting divs and going down in price. And the opposite.

 

[OldShooter]

... stocks have been providing great financial returns for generations.

Yes. For investors. For traders, not so much.

IMO it is people who conflate investing with trading who see the market as a casino. Over trading time frames it is a casino.

 

[youbet]

Yes. For investors. For traders, not so much.

IMO it is people who conflate investing with trading who see the market as a casino. Over trading time frames it is a casino.

Could you be more specific? What is the duration of "trading time frames?"

 

[OldShooter]

Could you be more specific? What is the duration of "trading time frames?"

I think five years is generally considered to be the minimum time frame for an investor, though if you look at historical trends you could argue for ten.

You can look at the length of most bubbles (tech bubble, RE bubble, etc.) as maybe illustrations of traders' time frames. In very recent history, ARKK's portfolio and its own meteoric rise then spin, crash, and burn is maybe another illustration. That took a couple of years.

Another way to look at it is through the S&P SPIVA reports. Beginning around five years of history the number of successful traders (the ones beating their benchmarks) is substantially diminished. By ten years, only a single digit percentage of traders have been lucky enough to beat. For "their benchmarks" substitute "a passive portfolio."

As Warren Buffet observed: “The stock market is a device for transferring money from the impatient to the patient.”

 

[ERD50]

Is it always "guaranteed" that if a company retains the exampled 4% that the stock will increase by 4%? I've observed companies cutting divs and going down in price. And the opposite.

There are always outside influences in the real world. But conceptually, and I think it has been shown on average in studies of real life (with enough samples to filter out the noise), that it does happen that way.

Again, I'm speaking in terms of the concept, and "all else being equal".

-ERD50

 

[RobbieB]

Concept? Book value?

None of these have anything to do with share prices which are "market value" and subject to change like the Kardashians.

 

[ERD50]

Concept? Book value?

None of these have anything to do with share prices which are "market value" and subject to change like the Kardashians.

Yes, it's a concept - how else can you try to understand something like this? What's the problem?

Life is not a laboratory or a Petri dish. You won't find two stocks in the real world that are identical in every way except that one pays a div, and the other retains it. That doesn't invalidate the concept.

Would you agree that for a poorly insulated house in the Midwest, adding insulation should improve the heating/cooling bill? That's a valid concept, right? But.... in real life. the price of the utilities change, the weather changes, and use patterns change. The heating/cooling bill could increase after adding insulation. That doesn't invalidate the concept either.

-ERD50

 

[arcyallen]

Is it always "guaranteed" that if a company retains the exampled 4% that the stock will increase by 4%? I've observed companies cutting divs and going down in price. And the opposite.

I know if you're thinking of this one way, it's hard to see it another. Let me try to make it easier to see:

If Johnson and Johnson was at $100/share and paid a $3 dividend, with zero trading going on, the stock price would drop to $97.
If Johnson and Johnson was at $100/share and paid no dividend, with zero trading going on, the stock price would stay at $100.

In both scenarios, you end up with $100. It doesn't matter if it's 1 share at $100, or 1 share at $97 and $3 cash. The actual paying of the dividend is a zero sum event to your wallet. There are internal reasons for a company to pay a large dividend or not varied, but the immediate result for you is the same.

 

[NW-Bound]

I know if you're thinking of this one way, it's hard to see it another. Let me try to make it easier to see:

If Johnson and Johnson was at $100/share and paid a $3 dividend, with zero trading going on, the stock price would drop to $97.
If Johnson and Johnson was at $100/share and paid no dividend, with zero trading going on, the stock price would stay at $100.

In both scenarios, you end up with $100. It doesn't matter if it's 1 share at $100, or 1 share at $97 and $3 cash. The actual paying of the dividend is a zero sum event to your wallet. There are internal reasons for a company to pay a large dividend or not varied, but the immediate result for you is the same.

+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.

Meanwhile, the non-paying company must have similar profits, and then instead of paying dividends it retains the earnings to invest in the right projects to grow in the future.

A dying dividend-paying company will stop distributing the dividend when its coffer gets empty and not replenished.

A growth company may invest in bad projects that go nowhere and waste all that good money.

This means one cannot look at the dividend to determine the prospect of the company.