The Stock Market is for suckers….

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I wanted to respondto Tom Hawks comments. Someone i respect a lot, but who i disagree vehemently on this topic.

Tom I stand by what I said. You can have as long a term horizon as you want, but like most other long term plans we have, most peoples lives dont match up to their “horizons”. Its amazing how life intervenes. Kids, whatever. its a fortunate few that can just shell it away and never touch it. Your “horizon” hits a dead end when you have to put money into a checking account. I have never seen any investing research that deals with random withdrawls that represents real world. And boy oh boy, if life hits you hard when the market is down, you make a withdrawl and you wont ever catch up.

But thats just the start of the problem. Lets say you buy into what the brokerages and funds are selling. Buy and hold, or whatever. How do you pick from the 17k funds ? By reading some websites ? By talking to some friends ? By watching the commercials ? By selecting among the optionsyour company gives you in their plan ? Which of course was the result of a salespitch that the fund company put together to the person offering the plan to your company. Everyone is getting paid on the gravy train, except for the guy putting in the money at the end.

Wall Street has done an AMAZING job of creating conventional wisdom . “Buy andHold “is the 2nd
most misleading marketing sloganever, after the brilliant “rinse and repeat” message on every
shampoo bottle. Weas 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. Its for suckers.

Ive traded stocks for almost twenty years now. IM good at it. When i work at it. And it takes a lot of work. Not just reading all the 10K/Qs and corporate websites and product managers, or talking to people at the outskirts of the company where management doesnt reach. It takes often knowing the market for a company’s product better than the company does. After all just because a company is public doesnt mean a thing other than someone has , and continues to make money buying and selling the stock as their own product.

If you are going to trade stocks, you just have to follow one rule and remember one thing. That rule is
always have a definite knowledge advantage about the company you are trading, and always remember that every stock transaction has a sucker, and you have to know whether its you or the person on the other side of the trade. No one buys a stock from your, or sells one to you knowing they are leaving money on the table.

The bottom line is that unless you plan on making it a full time job to do your research and put yourself in a position to have an advantage, you are going to get your ass kicked at some point by someone who does. You just have to hope that it doesnt put a big financial hurt on you when it happens
The same logic applies to funds. Funds are in the business of making money for themselves first. You 2nd.

First check what the heads of some public mutual funds are making. Someone help me out, I cant find the link right now .Was it Mario Gabelli who not only paid himself more than his fund earned for its shareholders in a year (forget the people with money in his funds), but he was paying himself from like 3 companies at the same time? Get me the links and I will update them here.

Then you should check the turnover of fund managers some day. You know where the good ones go ? To start or manage their own funds.

Then there is the portfolio turnover. How often they completely turn over the stocks in their fund. last
numbers I saw was that on average funds turnover their portfolios 85pct every year. Thats not investing. Its fund managers doing whatever they can to beat their peers, knowing that if they dont, they are out of a job. Their bosses know that if they dont beat their peers, the money flows out, and that is a HUGE problem for any fund. So many funds take chances they shouldnt, with your money. We never see any headlines for funds that close.

Why is that ? We never see any headlines for fund managers who get fired. Why ?

But even if performance sucks, rather than saying how bad it is, they pick the short stint when it wasnt so bad. orbes

did a nice job reviewing this little marketing habit of fundsand referencing some manager turnover issues at Fidelity.

As far as ETFs. Which one ? Remember, the Dow and S&P are marketing tools. They change the indexes. Look at the stocks in there today, vs what was in there in years past. You are not buying a passive investment that tracks nthe economy. You are buying the stock pickers at those respective indexes. Last time I looked, both Dow Jones and McGraw Hill are for profit companies. They want people tothink theirDJ 30 & S&P 500 indexes are
powerful indexes that can be reported daily as a reflection of market action. So they change the stocks when they think they need to. To help them with their product.

Ive 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. Its happened
before, it can happen again.

Which is exactly why we get all these nonsensical commercials from brokerages. To keep the money coming in . I
wish someone would index the amount of money spent on marketing by mutual funds and brokerages to the Nasdaq and Dow
and see if it correlates.

Money inflows drives the business. We can get all the economic data we ever dreamed of getting, but if money
inflows declined significantly for an extended period of time, then every rule of thumb would go out the window until
money started flowing in. Yes it would flow in eventuallyas prices dropped. From big investors like me
who wouldnt have gotten hurt by a huge market decline and could come in and buy huge chunks, or companies
outright.

You ? You probably would be like Charles Ponzi’s customers. You wouldnt be able to get your money out of the fund
when it went down, and by the time you did, it would be too late. You would have been crushed.

Ive said it before,a stock that doesnt pay dividends is valued like a baseball card.
Just whatever you can sell it for. The concept that you own “your share” of the company is a joke. You are completely
at the whim of the CEO and board who will dilute you on a daily basis with stock options, then try to buy back stock
to cover it up and push up the price, rewarding the shareholders who get out, rather than those that continue to hold
the shares. Meaning you.

Have you ever seen Warren Buffet talk about buying 100 shares of anything k shares ? or does he take control of
, or purchase a material percentage of a company ?

If you have enough money to have influence , take control or buy it outright, then the stock market can
workfor you. Thats why I buystock in public companies that relate to myother business
entities. When i pick up the phone and call the CEO of a company i own shares in, they call me backvery
quickly. When I ask if there arebusiness opportunities that make sense for the company and another company of
mineto work together, I wont always get the business, but Iwill always get a meeting.If Im smart
about the investments I make, the more important returns come from the relationships with the companies than the
action of the stock.

If the best you can do is buy shares that are going to be continuously diluted, then you are merely a
sucker.There is a good chance that the shares you boughtcame fromsharesan insider who got
stock options. You just helped dilute yourself with your first share purchase.

The wealthy can make the stockmarket work for them. Individuals buying shares of stock in non dividend paying
stocks… they work for the stockmarket.

I know Ive painted a pretty bleak picture.

The stockmarket isnt going away. Would it shock me if the whole thing collapsed ? yes. it would. Its just too
engrained in our way of life in the USA. What would change my mind is if a better investment vehicle came
along.

The stockmarket used to be about investing capital in companies that came public or did secondary offerings. That
money was used to create amazing businesses and return dividends back to people who truly were investors. There
once was a day where most companies paid dividends higher than the interest rates on their bonds. Why ? Because
stocks are inherently more risky. If a company goes belly up, bondholders collect first, shareholders usually
last. People could buy and hold stocks, and get paid real cash money for being a shareholder in the company at
rates far higher than the divident yields we see today. If the company did well, the dividends went up. Investors who
held, actually got all their money back in dividends at some point and the rest was gravy. The good ole days.

But that changed when mutual funds came along and started marketing the concept of growth as a way to attract
investors.

Its not inconceivable that the old mindset could comeback. That a new market of stocks could be created where
companies didnt continuously dilute shareholders by issuing stock and options to themselves. Where earnings were
earned for the same reason they are in private companies, to not only fund growth, but also provide cash back to
investors. Now if that market existed today. Where I could buy 100 shares of stock, and even if it represented just
1/100000 of ownership in the company, I could have confidence that year after year, I would still own 1/100000th of
that company, and if that company generated earnings , I would have at least some of that money returned to me. Well
then, that wouldnt be a ponzi scheme. That would be a true market of stocks, and I would be happy to recommend to
anyone to be careful, but buying stocks in that market could be something worth considering if your appetite for risk
canhandle it.

Sorry for the long winded response Tom, but thanks for getting me going 🙂

If you put your money in safe bets like i mentioned in the last post, then you can spend that time you would
otherwise have to spend researching funds and or stocks, either with people you love, things you love to do, or in
yourself.Using those hours to be the best at whatever you love to do.Thats an investment you never
have to pay a commission on. You never get a margin call. And thereturns can be astronomical.

99 thoughts on “The Stock Market is for suckers….”

  1. thankyou sharing

    Comment by mehmet -

  2. I’m still waiting for Tom Hawk’s third “annual” review.

    Although you’ll probably never read this, I’d like to thank Mr. Cuban for making me think a little more seriously about where I’m putting my money. This post isn’t the only reason I was all bonds when the market tanked, but it’s certainly one of the reasons. I’m not a rich guy, so it wasn’t a lot of money on the line… but I worked damn hard for every penny.

    Thanks again,
    -Rob

    Comment by Rob -

  3. Pingback: Quotation: Mark Cuban | InvestorBlogger

  4. Mark, looks like you were right all along. I saw Mr Hawk last week pushing a shopping cart filled with #2 pencils and Red Delicious apples…

    Comment by Steve -

  5. The market is what it is; you simply have to be smart enough to know when to buy and sell. It’s just a matter of TIME.

    Comment by see two -

  6. Your post is nice.

    Comment by Karachi stock market -

  7. Pingback: Social Security Swindle — don’t let McCain make a sucker out of working Americans « Vote Nader

  8. Pingback: Quotation: Mark Cuban | Dollar Travels

  9. Pingback: » 401(k)’s and IRA’s Are For Suckers on Blueprint for Financial Prosperity

  10. The market is exactly what you make of it. Anyone who has started a
    business or has been self employed can attempt to become a good trader

    The market requires work and diligence. Sell when you are up and never leave your money on the table.

    Alexander Shlepakov

    Comment by Alexander Shlepakov -

  11. The Stock Market is a Pyramind scheme.

    He who knows when to sell wins.

    Comment by Tim -

  12. Stock Market….

    Where insiders take stock of the marks.

    Comment by Tim -

  13. This is what the stock market gets in my opinion.
    It’s the selfish, rich, executives that made this come fourth.
    Paying yourself more than you should be making, like Bank C.E.O.s,
    is one of the reasons why they went bankrupt in the first place. People
    getting greedy about money. I’m sure glad I’m not that stupid to invest my money
    on stocks just to loose my money. Sorry for all you suckers out there
    that got slammed. I could’ve told you so. I’m glad alot of those Rich
    gumps can suffer with there companies.

    Comment by j-money -

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  15. I\’ll say that people have unrealistic beliefs when it comes to the stock market. Most of the people lose yet most of the people starting out in stocks think they will make a nice chunk of change. People think they can control their emotions, yet they continue to make emotional decisions with their trades. I think at the minimum people should have some general understanding of business before they start pouring their money into stocks. Like anything else in life it takes a good amount of skill and information to stay ahead of the competition.

    Comment by Paul -

  16. Mark,

    You\’re a rich, smart, successful guy, but you shouldn\’t be giving advice about the stock market.

    The fact is, the biggest mistakes investors make are behavioral. So a buy-and-hold strategy is definitely the most rational fro anyone with a time horizon of five years or more. But it has to be coupled with a diversified, hopefully passive asset class strategy. Market timing is the absolute worst course.

    The Mavs are doing great. Stick with what you know.

    Jeff

    Comment by Jeff Troutner -

  17. how can you tell a real stock certicate
    from a corporation and a nonprofit corporation?

    Comment by chad weinberg -

  18. It’s whether most people think it is, that controls the outcome, and that depends upon who is in the market now. That is always the final question I ask. Who is in the market now? After 2000, is the stock market perceived as a high risk endeavor by most people?

    Comment by runescape money -

  19. MOST funds are like this, unfortunately, and then they pawn off their underperformance as, “well, our strategy was out of favor this year.” How’s that feel if you’re the client? And people wonder about the influx of $$$ to hedge funds? Performing great is hard, but insanity is when these guys do the same thing year after year and still do poorly.

    Comment by wow powerleveling -

  20. as much as i want to be a good capitalist rants like this keep pulling me back to my realization that our society is steamrolling in the wrong direction, whether it be stock markets, enviromental resources, immigration, population, pollution, waste, distribution of wealth, greed, corruptness, china, war, territory, drugs (prescription and illegal), media…

    Comment by idonothingallday -

  21. The gov’t leads the working slobs to the slaughter. You are limited where or what you can invest your future in. IRA, what a joke! A machine doesn’t put changes in stock market prices, a human does. How do I get on a board of directors? Rich people start funds so they can get richer. Our gov’t is run by and for rich people. Funds are for fund managers and companies are for ceo’s and the elite. If a person has a successful company and takes it public, he’ll make more money in one day than he will his entire life. The one with the most toys wins. I don’t know what they win!

    Comment by Richard Swanson -

  22. Hi

    “And yes, it would be nice if we had the kind of capital that Buffett did and could open the business doors and opportunities that he can. More than anything though the key to Warren’s success was the fact that he loaded up on the stock market when the P/E ratio of the market was low. When the P/E on the S&P 500 was at six in December of 1974, whooo hooo, what a time to buy!”

    Buffett was already very wealthy in Dec. of 1974, in fact, he had retired about 5 years earlier. And his “access to capital” was essentially personal savings. In his late twenties he did open an investment fund that was key to his wealth building, but he was already a successful investor at that point and had built a signifant net worth.

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    Comment by NIkita -

  24. I would have to agree with the title. Stock brokers, fund managers and the like are definately looking out for themselves first and always. The market only moves when there is greed or fear. Someone will gain, while someone will loose – this is the market.

    Comment by jay -

  25. Mark
    I agree with your points about dilution and dividends. And the whole industry around the stock market that is huge now and too much self centered. You forgot to mention 8,000 hedge funds also which are to large extent completely unregulated. Even though the SEC is making some efforts on this front to bring them under regulations. You are absolutely right they are not an exclusive club any longer. There is some movement on the options’ issue and soon all companies will be asked to account options as expenses. Which they are in reality. This may in turn curb some wild dilution by companies as shareholders will get a better sense of the real financial harm done by liberally applied options’ creation. As to the dividends the only way to make them more attractive is to increase them obviously. I believe it’s up to shareholders to demand better dividends if a company is in a position to deliver them. I also share your views that a small guy like me is basically being set up to lose money in the market from the start. However, I strongly believe that with the invention of internet and almost zero cost of information acquisition this balance of power is now moving more and more in favour of small guys like me. My view rightly or wrongly is that this ongoing information revolution and internet age is shifting the real power to people with brains not privilege. This is something that is going to change the economy, stock market and this planet forever. There is no going back now. However, not that many people have been able to successfully define this gigantic transition into the information age and economy but I am sure that those who did it like you did benefited and will benefit from the stock market through such insights in a spectacular fashion. In the end that’s what the stock market is all about. Only a small percentage of people will make a big buck out of it but still that’s enough reason to keep the game rolling in order to make dreams possible. So I would end my comments on a positive note focusing on both opportunities in the old economy and cutting edge companies which are already out there waiting to be discovered and spotted by some sharp eyes. I hope you will find some more attractive companies that will meet your criteria for investing soon but in the meantime good luck to you and take care.

    Comment by Robert K Dean -

  26. Well said Mark. It’s like anything in life as you well know, you have to go in with 100% dedication.

    Keep on bloggin’ –

    Comment by Daniel -

  27. It’s all a ponzi scheme, homes, stocks and every other investment. The bottom line is you need to learn how to profit from it. I love to short the pump and dumps when Booyah boy runs a stock up, then look for the time to short the Ponzi Scheme as it unravels. Since the market is not going away, you just need to figure out what side to play.

    Thanks for telling it like it is.

    Comment by Trockmann -

  28. You were great on O&A a few days ago! However, reading this post reminded me why I stopped subscribing to your feed. Incredibly verbose relative to the actual point you’re trying to make. Anyhow, just wanted to let you know that you were great and entertaining on XM.

    Comment by Tom -

  29. First of all, I think Mark’s post is a fantastically well-written and compelling statement about the stock market in general. I agree whole-heartedly with the spirit of his position.

    But understand, his advice is relevant only if you are someone who really does need a reminder that the stock market was only a means to an end that we got involved with for the reason of other, human, ends..

    From a critical perspective like Mark’s we might be able to judge better whether we are wasting our time getting drawn into the tedious technics of endless stock market speculation.

    On the other hand, perhaps one realizes this and yet authentically enjoys the risk of the stock market for the sake of itself. Mark isn’t moralizing against that idea, but a few posters seem to be reacting that way and attempting to provide defensive justification or logical grounds as to why one/others ‘should in general’ be in the stock market. If that be the case, then you truly have ‘drunk the kool-aid’ and have perhaps become a kind of virus in the service of the money bag Ponzis of the market.

    “He that is of the opinion money will do everything may well be suspected of doing everything for money”
    – Benjamin Franklin

    DIY.

    Comment by Tom McDonald -

  30. I guess the supply and demand nature of it causes the crazy pricing. Like a auction. The price is only as sensible as the person bidding. Except worse, if you are bidding market. You may be in the que for awhile.

    Fool.com picked up on this thread, and wrote an article. It was about a month ago, but I just saw it recently. Anyway, their article was interesting too.

    Comment by Haake -

  31. Interesting and insiteful. I’m sure this is a significant factor in many of the stock prices. It helps explain some strange stock price movements I have seen. There is also another strange factor in the market that throws off value pricing of stocks. The Buffet factor effects stock prices in unexpected ways. Warren clearly espouses seeking quality – profitable companies and good management. But what he says is often missed. Many folks use him as an example where it doesn’t fit. Institutional buyers also miss his points and try to follow him with poor substitutes. For example Berkshire bought a quality manufactured home company, a growing company with a quality product and excellent management. Interestingly the stocks of failing companies in the same industry, ones losing assets, capital and market share and who are keeping up with their debt by diluting their shares thru stock sales, have also seen their prices go up. They have gone up because folks and institutional managers, buy the stocks because Warren has a company in the industry. The Logic apparently is, if Warren is in the industry it must be a profitable place to be. They completely miss the fact that he has bought the cream of the industry. He left the crap alone. But so many claim to copy Warren and believe they are doing it that they move and hold up the prices of the dogs. Exactly the stocks Warren says to avoid. There are many strange factors that effect the stock prices. I hope one day to understand enough of them to be consistantly profitable with my picks. Your points are insiteful and will help me in my future evaluations of a stock price and direction.

    Comment by Forrest -

  32. Mark wrote: “always remember that every stock transaction has a sucker, and you have to know whether its you or the person on the other side of the trade. No one buys a stock from your, or sells one to you knowing they are leaving money on the table.”

    This is total bullshit. For example, I’m 60 and have a great portfolio, but as I age I want to reduce my exposure to equities and increase exposure to fixed-income interest. So I sell some stock, despite believing that the company has excellent prospects. No one is a “sucker” in this transaction.

    Comment by matt -

  33. Well you could argue the whole economy and working thing is for suckers.

    Most people are working jobs they hate to buy stuff they don’t need to impress people they don’t like.

    The stock market is just squeezing more juice out of this whole lemon.

    Comment by Hone Watson -

  34. Jesse Livermore shot himself in the mens room of, I believe, the Sherry Netherland, feeling he was a failure. He went broke several times in his career. Had the yachts too, though.

    Comment by KBK -

  35. Mark

    Mark, I must say I have seen you in the Media and did not like you. But I do like, how you think. I have for many years not trusted the investment community for the very reasons you have highlighted. The investing public needs to remove the “mind set” of trying to hit home runs with every investment, as well, invest in what they understand. In other words, if you need an interpreter for terms like “amyloid peptides, neurotoxic fibrils,” either learn what it means, or DO NOT invest in the Biomedical markets. Years ago a group of elementary school children were given a project to create a $1,000,000.00 investment portfolio. Guess what they invested in, yup, Nike, Proctor Gamble and other product company’s they understood, and yup, they did well. Could the stock market be that easy?

    Comment by chris couzelis -

  36. There’s a great book on Mutual Funds, “The Trouble With Mutual Funds”, that explains why mutual funds are for suckers. This does not include Index Funds, rather those funds that try to outperform the market.

    I believe the market can be conquered, but like Mr. Cuban said, you must invest your time first.

    Jesse Livermore, still considered the best trader ever, was often asked, how can you make money in the markets? Later in life, he would simply answer he didn’t know. Mind you, he made $100 million dollars in the 1929 crash.

    He compares the question to asking a brain surgeon how can I make some money in brain surgery?

    Jesse Livermore, like many of the top traders today, DEDICATED their lives to beating the market. Most people are not willing to pay that price.

    Comment by Joe H -

  37. IMO, the managers of companies go for growth rather than dividends because the tax on growth is at the cap gains rate, whereas the tax on dividends is at the corporate rate *plus* the individual’s marginal rate. That fact has driven the mutual funds which own most of the equities, and they in turn have driven management. Of course, things have changed lately, but it will take many years for the focus on growth to change.

    Also, it’s said that companies pay dividends only when they can’t figure out how to profitably invest their extra cash.

    Issuing shares isn’t dilutive per se. Assuming a company selling at book issues an equal number of shares to what is already in the market. Sure, there are now twice as many shares in circulation, but funds the company received for the sale are added to the book value. If still selling at book, price per share is unchanged.

    If treasury stock was issued to cover stock option grants, it’s more complicated, to be sure, but basically the company is paying back the grantees for the value they added to the company (and to all the existing shareholders). A going concern has to buy back shares to hold in the treasury, to be issued when the options are exercised. If the company buys back when the price is low relative to average growth, that can be a good deal for all involved.

    Do the grantees actually add the value they receive? Well, that’s a really difficult question but one that’s only significant for young companies.

    It sounds to me like you feel you made your money on the backs of the people who funded your ventures. Not a very attractive position for you to take.

    Comment by KBK -

  38. “Have you ever seen Warren Buffet talk about buying 100 shares of anything ?1k shares ? or does he take control of , or purchase a material percentage of a company ?”

    Currently Warren is limited to buying huge positions in huge companies. He’s simply got too much money and believes in a “focused portfolio”. If he believes in an investment idea, he’ll put a significant part of Berkshires money to work in it.

    For most of his history, starting in the early 50’s, he bought stocks and bonds just like you and I. Berkshire was his acquisition in about 64, and I don’t believe he did another until See’s Candy’s in the early 70s. As Berkshire’s portfolio grew he naturally gravitated to buying control positions (if you really like the business at this price, why not buy the whole thing if you can?). But still to this day he’s got a big portfolio stuffed with minority stakes in Coke, PetroChina (where he absolutely has no control), Washington Post, etc.

    Comment by Randy Hill -

  39. “And yes, it would be nice if we had the kind of capital that Buffett did and could open the business doors and opportunities that he can. More than anything though the key to Warren’s success was the fact that he loaded up on the stock market when the P/E ratio of the market was low. When the P/E on the S&P 500 was at six in December of 1974, whooo hooo, what a time to buy!”

    Buffett was already very wealthy in Dec. of 1974, in fact, he had retired about 5 years earlier. And his “access to capital” was essentially personal savings. In his late twenties he did open an investment fund that was key to his wealth building, but he was already a successful investor at that point and had built a signifant net worth.

    Comment by Randy Hill -

  40. What the heck? Now I’m hearing that OSTK’s high for the day (on Jan 11th) was actually only $30.61? That would have been an almost EXACT 10% gain (from the $27.86 share price I mentioned in prior comments.) Strange….

    Where’s Fox Mulder when you need him….? 😛

    Comment by StockMaverick -

  41. The stock market, with regards to the long-haul, is a game for suckers and I agree with you. However, you framed this argument in terms of long term investments for individuals. Proper risk management and taking advantage of short-term sentiment can prove to generate quite a bit of wealth for even the simplest of investors.

    It’s the “buy and hold” strategy that is completely bogus. The vast majority of the commonors in this society don’t truly understand where the actual “wealth” is generated when it comes to investments, whether those investments are stocks, bonds, real estate, or commodities. They just know that “things went up before.” They’re just betting it’ll go up again on the mis-advice of crooked brokers.

    I’d like to make a point, though:

    You mention that you are able to make a call to the CEO and have him respond to you. The reason you do this is because you want the information about how your business is doing. The way for the commonor to get this information is by looking at the price action and volume of a stock on the stock market.

    Looking at price action is a less direct way of knowing what the insiders and people who are more closely connected to the CEO are thinking. The fact that so many people fail to even examine the price action of stocks in the short-term is the problem. You see, your “calling the CEO” is one avenue for the retrieval of information. The other avenue is observing institutional selling on the NYSE and knowing that something is wrong. Your method of calling the CEO and the observing the price-action method are both ways of obtaining information. The real problem in the entire process is that the typical person thinks that this information-retrieval process is not required if their broker suggests that some vague set of “fundamentals” are sound. Really, I think the key thing to be harped upon is that the stock market generally does not force its commoner participants to be active seekers of information, even when it’s in their best interest to do so. CDs and savings accounts are more forgiving for the uninvolved investor.

    However, even with the lack of information-retrieval by many investors, you cannot deny the various success stories and wealth that the market has generated for individuals who have actively embraced the process of retrieving information. The stock market, then, no longer becomes for suckers for these individuals. It becomes a genuine vehicle for wealth building.

    I hope more articles such as yours shake people out of this mindless concept of buying and holding. Passive investing without active information retrieval truly is gambling.

    Comment by Trader -

  42. (OSTK) TECHNICALS REVISITED: Jan 11, 2006

    Today the scenario I suggested in a prior comment (see above) played out fairly accurately –(OSTK) ran up to $35.02/intraday, but then sold off at resistance. To be honest, today’s trading action probably had much more to do with a ‘short covering’ squeeze, as opposed to being the product of a true technical event. Having said that, I do believe the (OSTK) technicals were indeed favorably set up for such an occurrence to take place. Inevitably, as is the case with most short covering events, (OSTK) sold off as quickly as it had risen (intraday).

    In the end….I suppose I really didn’t prove anything….Still, I tried….

    Jim Parham
    Yuba City, CA

    Comment by StockMaverick -

  43. As a gold bug for 6 years (and living on a complete gold standard for a little over 18 months now), I agree that the stock market is for suckers. Any time someone sells you a service and you pay whether you win or lose, you have to think twice about it.

    The stock market is affected by supply and demand just like any product or service. When government inflates the currency base, they artificially raise consumer prices (thereby raising wages, too). This inflation is from more money pumped into the economy. More money at low interest (easy credit) means people will take bigger risks. There’s the housing bubble and there’s the stock market bubble.

    The day will come when stocks will return to 6-9 time earnings — I can only hope it is soon. I’ve gotten rid of all banking, all credit cards and all paper stocks. The only stocks I own are in my own businesses (where I actually have control and don’t come under the auspices of the SEC). I sold all my high-priced bubbled properties too and invested in the housing markets that are not affected by the bubble — no mortgage. The rest of my savings is stored in the ultimate form of wealth storage — gold.

    If the economy does correct, my gold and my property should be just enough to buy back my bubbled properties at 20-50% discounts. If the economy doesn’t correct, I’ve set myself up with a great way to live — difficult to make impulse purchases, but able to live VERY comfortably to the point that I work half as much as I used to, but I travel 5 times more than I used to.

    Great blog.

    Comment by A.B. Dada -

  44. (Reference StockMaverick comment above)

    THE STOCK MARKET, SUCKERS & OVERSTOCK. com….

    After a long day of tendin’ to the sheep (and one another)….Lolli, Tootsie and Jethro sat in the barn discussin’ Wall Street, magic beans, and the trading tip they had received from StockMaverick the prior day….

    LOLLI: “Well fellers, I’m not so sure about that slick-tongued StockMaverick, or those magic beans he sold us yesterday. Ya know, I think he pulled the wool over our eyes….Tellin’ us to cover our short position and to go long (OSTK). After all, the stock closed in the red today….and I think that means down!”

    TOOTSIE: “Yeah, I knows what ya mean, Lolli….That yella-belly StockMaverick took us for Wall Street Suckers! All that fancy technical talk about the MACD-onalds and the oversold Stock-ass-tics ain’t nothin’ more than snake oil elixor….”

    JETHRO: “Hold up there Lolli & Tootsie….Why you two suckers are dummer than a bag a’ hammers if ya think ole’ Jethro is a Wall Street Sucker like you! After all, StockMaverick told us his magic beans had a 10 day shelf life….Just ‘cuz we planted those seeds today, don’t mean we’ll sprout a $green$ harvest right away. Give ’em a few days to work their magic….”
    “B’sides, the only reason the stock didn’t go up today was ‘cuz of that Sith Lord….Ya know, the one ole’ Patrick “Crash and” Byrne talked ’bout in the (OSTK) conference call….”

    Jim Parham
    Yuba City, CA

    Comment by StockMaverick -

  45. The stock market may be for suckers, however I believe all stocks can be successfully swing traded using technical analysis….

    Hows’ about a real-time test?

    I’ve never before traded Overstock.com. But since Mark is short 20k shares (OSTK), let’s use that stock as an example and make a paper trade….

    Monday, January 9, 2006
    OSTK $27.86 (Monday’s Closing Price)

    As a swing trader, I would buy-to-cover the (short) 20k share position and go long on Tuesday, Jan 10th. Why? The MACD, while very negative right now, is setting up to turn north (near term)….Plus the Fast Stochastic (OSTK) is very oversold and is looking to head up. Obviously I’m talking about a near term trade. In my opinion, (OSTK) is currently set up for a quick 10%+ profit on the long side. Ten percent is ten percent….Right?

    If the scenario above plays out, and I say ‘if’ because technical analysis helps to predict probability not certainty, I would then ‘short’ (OSTK) again in the low-to-mid $30 range – resistance area – Pocketing a quick 10%+ profit….(Time Frame: <10 days)

    Jim Parham
    Yuba City, CA

    Comment by StockMaverick -

  46. Mark,

    I’m suprised about the Warren Buffet comment (implying that he only made his fortune by taking over controlling shares in companies).

    There’s a great book on his life titled, “The Making of an American Capitalist” by Roger Lowenstein. He was running profitable businesses as a teenager. He was very successful in the market long before buying Berkshire.

    Another horrible scam that you forgot to mention is the inflated nominal returns pushed by Wall Street marketing vs more realistic real returns. 10-12% returns for the long haul is just a myth. Subtract inflation, taxes and transaction costs and returns are much, much lower.

    If you showed the average person on the street a chart of the DOW from 1966-82, they’d think the market was flat. Their money did nothing for 16 years. Yet after some hefty inflation, the index lost 70-80% of it’s value. Buy and hold didn’t look so good.

    Comment by John -

  47. Mark, you need to watch the over-arching pretentiousness that’s beginning to emerge in your writing.

    You got lucky. It doesn’t mean shit. Get over yourself.

    Comment by John Navin -

  48. Mark,

    ““Buy and Hold ” is the 2nd most misleading marketing slogan ever, after the brilliant “rinse and repeat” message on every shampoo bottle.”

    We watch TV. Most of us have actually seen your hair!!!

    Paul

    Comment by Paul Pate -

  49. Mark, guess you never read “The Zurich Axioms” by Max Gunther. Risk is good, it makes the world turn. Life is one big freaking risk, you wake up in the morning and walk out the door, that’s a risk. I want to live a little. When was the last time anyone got a thrill out of buying a CD at WAMU? If I were a billionaire I would probably buy CD’s and go back to sleep, but I’m not worth a billion, and 4% just doesn’t cut it for me. The stock market while full of shit is a lot less full of shit than it was back at the turn of the century. Brokers today are boy scouts compared to the brokers and bankers during the 1929 crash. You obviously have not been spending much of your time reading history. Do people really buy stocks through a live stockbroker anymore?

    Comment by James -

  50. Mark, guess you never read “The Zurich Axioms” by Max Gunther. Risk is good, it makes the world turn. Life is one big freaking risk, you wake up in the morning and walk out the door, that’s a risk. I want to live a little. When was the last time anyone got a thrill out of buying a CD at WAMU? If I were a billionaire I would probably buy CD’s and go back to sleep, but I’m not worth a billion, and 4% just doesn’t cut it for me. The stock market while full of shit is a lot less full of shit than it was back at the turn of the century. Brokers today are boy scouts compared to the brokers and bankers during the 1929 crash. You obviously have not been spending much of your time reading history. Do people really buy stocks through a live stockbroker anymore?

    Comment by James -

  51. Mark, you mention you could be convinced if the stock market had a fundamental change, ie – a new investment vehicle. Well here in Canada there is has been a massive shift in the way companies are coming to market. Billions per year are now being raised through the issuing of trust units instead of common stock. Companies basically payout a large portion of their free cash flow (50-85%) to unitholders. These payments enjoy tax advantaged status here in that dividends are taxed at a higher rate. I would peg the average before tax payout at 8-9% with many paying above 15%.

    These changes in the last 5 years have fundamentally changed the makeup of the Canadian stock market as a large portion of underwriting business has shifted away from common issues to trust conversions. Initially companies making the shift consisted of mainly energy and mining firms with lots of cash and few opportunities, but now all kinds of firms from Cinram (the world’s largest DVD maker) to phone book companies, anyone with a somewhat predictable earnings stream, are making the change. Demand for these issues has been huge as income hungry investors struggle with low interest and dividends. The only downside has been that now even companies without the necessary steady cash flow (last I saw was an airline) have been considering making the change for tax reasons & fear of seeing trading in their common dry up. Yields on many units have also declined as unit prices have rising (but why complain about that). There is some fear that our companies are shooting themselves in the foot, always paying out instead of re-investing in the company. And while there are definitely companies not suited to this type of structure, I think the jury is out as good opportunities will always attract capital. All in all, I believe this shift has provided a tremendous boost to our market and breathed new life into the idea of investing. Our broad market index has doubled from it’s lows 5 years ago, mainly from strong commodities prices, but partly due to interest in trusts. There are already a handfull of these Canadian trusts interlisted on the US market. I hope the idea can catch on with our friends to the south.

    Comment by Darryl -

  52. Cuban vs. Hawk, unconventional wisdom vs. conventional wisdom. Both are wrong, just in different ways. At least Hawk proofreads his copy.

    But I prefer Cuban, typos and all. I can read Hawk’s shopworn nostrums anywhere. But Cuban’s weird and wonderful post is refreshing and thought-provoking, even if it is replete with bizarro investment advice packaged for everyone that, in truth, is appropriate for just a few (well-off) niche players.

    If Cuban keeps up in this neuralgic vein — why are you so unhappy, Mark-o, even with all your billions?? — I suppose we’ll hear next that we should hide all our money under the mattress….Hmmmm.

    Comment by NKC -

  53. You need to write a blog entry on the topic of money in general in our system and how its been a fiat currency since 1971. This will help people better understand why Wall Street and the federal government work the way they do. Of anyone that can make a difference to the masses about explaining money, I would think it would be you. Everyone should remember that all roads lead to inflation when you have a currency system like ours. Money itself isn’t made or lost, it just changes hands and affects people’s perceptions on who has more. The problem is money sitting in a bank account is simply a loan to the bank which you aren’t getting more than rate of inflation for loaning it out to the bank. So where else are people to put money in a system where you HAVE to keep up with the rate of inflation ? The stock market, real estate and “commodities” for starters. The currency system is one big game where the lower classes get herded like sheep and the rich always stay wealthy.

    Comment by Shake -

  54. Mark – You’re right in a sense, but your prognosis is the ultimate irony considering that you made your billions selling a company without earnings at a huge valuation to a company that is currently trading at more 50x ebitda (much more in 99). The problem with your wish for a stock market to emerge where dividend yields are high is that it runs counter to the ambitions of most entrepreneurs and people that start companies. The number one goal of entrepreneurs today is to command huge exit valuations for the companies that they start; most entrepreneurs are more interested in liquidity/exits at high valuations than building to live off the cash flow of their businesses. This latter point is self-evident; if entrepreneurs were cash flow minded, they tend to put off investment rounds since they are often profitable and don’t need the cash and/or don’t want the dilution until much later (Gates, Dell, Ellison, Sam Walton, etc..) If the entrepreneur is focused on profits and cash, he doesn’t need equity investors and you can’t buy his stock. If a business generates cash flow, it can borrow from a bank; get the cash, keep the equity, service the debt from cash flow. Only if an entrepreneur is shooting for the sky and structures a high-growth, but risky business operating in fast-changing markets does the entrepreneur need capital and offer the chance for investors to get many times their money if the growth rates are met. Businessmen that generate cash flow from businesses aren’t interested in leaving money on the table for common equity investors to get high dividend yields especially when interest rates are really low and any company that is profitable can borrow cash. That’s the problem: Everybody wants to get rich and you need to sell growth to make it happen in the equity markets (angels, VCs, and Wall Street.) Great businesses that generate great cash flow generally don’t need equity investors.

    Comment by Bhu -

  55. some dupe wrote:

    “..I have decided to by stock in Brokerage companies since they can never lose money….”

    Please tell me you’re kidding — brokerage/financials service stocks can get pounced on in an inflationary, high interest rate environment..

    Comment by stock junky -

  56. After reading your message and the comments,
    I have decided to by stock in Brokerage companies since they can never lose money.

    Comment by Sunrise -

  57. One other thing – any thoughts about the rumblings in the telecoms industry of charging web services for additional load requirements on the network?

    Comment by Ivan Barrios -

  58. Like the discussion. Agree with your assessment Mark that the the consumer financial industry is set up with perverse incentives to appropriate wealth to itself at the expense of those they claim to “advise”. In addition to the industry’s incentive to attract investment inflows (as you point out) it also benefits from outflows. Hence, Wall Street’s admonitions to “buy, buy, buy!” when it’s hot, and “sell, sell, sell” when it’s not. All of this is really a way of increasing the revenues of the brokerage houses. Much of those revenues are derived from imposing frictional costs that are incurred no matter what direction the money is flowing in. So, I wholeheartedly agree that the best investment strategies will involve minimizing the use of advisors who’s admonishments are designed to appropriate wealth to themselves at our expense.

    I’ve found commentary by Warren Buffett and Charlie Munger on this topic to be particularly insightful. I highly recommend a collection of talks given by Charlie Munger over 3 decades that outline the Buffett/Munger philosophy in this area. (www.poorcharliesalmanac.com)

    One relevant aspect of what Mr. Munger talks about is what he calls the “Psychology of Human Misjudgement”. Part of this misjudgement, he says, has to do with the the psychological power incentives play on us. He seems to imply (and I agree) that no matter how moral we think we are, our behavior can be strongly influenced by the power of incentives, without us even being aware of it. So, what’s happening on Wall Street is really a manifestation of this. I doubt that most brokers wake up in the morning and think, “How can I screw my client out of more of their money today”, but instead makes the simple assumption that what’s good for them (the broker) will necessarily also be good for the client.

    Comment by Ivan Barrios -

  59. Mark,

    You say that you would like to see a market where shares are never diluted and money is consistently paid back to investors, presumably as dividends.

    Why don’t you try doing yourself this with a public company you control? You could easily write into the Articles of Incorporation the maximum number of shares that will be issued and a guaranteed dividend that will be paid as long as the corporation is profitable. Of course, you would also need to provide for compensation for shareholders if these provisions of the Articles are ever modified (essentially a poison pill).

    Comment by Daniel -

  60. Mark, you are exactly right when you said, “Money inflows drives the business. We can get all the economic data we ever dreamed of getting, but if money inflows declined significantly for an extended period of time, then every rule of thumb would go out the window until money started flowing in. Yes it would flow in eventually as prices dropped. From big investors like me who wouldnt have gotten hurt by a huge market decline and could come in and buy huge chunks, or companies outright.”

    As a result, it’s always nice to have a good fundamental story behind a stock, but it’s much, much more important to pay attention to the price action (ie. the technicals) since that’s what ultimately determines one’s profits or losses. The greatest story in the world can still lose you a ton of money if money inflows don’t exceed money outflows. The research gets much more simplistic also since you don’t have to decipher stories, expectations, or truths. All you need is what you already have–the charts!

    Comment by Mike V -

  61. Great post, Mark. I will be entering the professional investment world in about a year and a half and I have many of the same criticisms. Although the market isn’t quite out to get everyone as much as you suggest, much of what you say is spot-on. But, I will enter the field having been clients of overpaid, underperforming fund managers. MOST funds are like this, unfortunately, and then they pawn off their underperformance as, “well, our strategy was out of favor this year.” How’s that feel if you’re the client? And people wonder about the influx of $$$ to hedge funds? Performing great is hard, but insanity is when these guys do the same thing year after year and still do poorly. I meet portfolio managers frequently who, after meeting them, I think, “I’d have fired you long ago.”

    For the lazy people, I recommend Powershares. If I had thought of it, I’d have built those things. And as a note, I’m not affiliated with them, but I do own ’em. At least there’s no money manager to fire, just a computer.

    It’ll be interesting when I enter this field with the beliefs that I have.

    Comment by MarketWizWannabe -

  62. Hey, Mark,

    Since Berkshire Hathaway has never distributed any dividend, I believe you value the company as much as a baseball card, is that correct?

    Luis

    Comment by Luis -

  63. Mark,
    The problem with your argument is that if you had put all your money into the S&P in 1990 and did NOTHING else, you’d average 12.2% even including the bubble pop in 2000…. thus I don’t buy your argument.
    JB

    Comment by Jeff -

  64. No one compared a CD to stocks, but if you hit a rough patch and withdraw some money from either an IRA or a CD, you still have the opportunity to make money in an IRA with the money left in there. With an CD, you get your money back minus the bank’s early withdrawal fee. So you have no opportunity to gain.

    Seems everyone is more interested in controlling losses than in making gains. Too risk averse if you want my opinion.

    Comment by Chris -

  65. Mark

    Your post discusses many aspects of investments especially as related to the stock market. You neglected several elements. This is a very complicated topic.

    It is really the interplay between a person’s investments (wealth) and lifestyle and life events that determine how close that person comes to his/her goals. Many of those events are difficult to predict IF they will happen as well as WHEN.

    The vast majority of the population needs to find a way to accumulate enough capital to cover their expenses during their non-working years (voluntary or forced retirement, or disability).

    This road to wealth accumulation is complicated by life events, as you mention. Many people are ill prepared for many of these events but they make do and make adjustments without regards to the consequences “down the road.” Ask your associates, subordinates and casual acquaintances if they are ready if anything (debilitating illness or injury, lawsuit from out of the blue, catastrophic event to their major assets (home and car) wayward child, the need to assist parents, etc.) happens to them and see where the discussion leads.

    This road to wealth accumulation is further complicated by the tax laws and changes thereto. Tax rates, brackets, credits, etc provide incentives for people to follow certain investment strategies.

    Your first tenet in your investment strategy is to “Avoid Risk.” While this will guarantee that future wealth is predictable, it neglects factors that will affect a person’s (real) wealth accumulation. Will I have enough money to pay for the things I need and want? Will I have enough to cover contingencies that could happen (kids, buying a house, upgrading lifestyle, losses uncovered by insurance, etc)?

    Frequently someone, usually in the mid-30s to mid-50s will determine that they need to earn more from their investments in order to attain their goals. That person does that because they are comfortable in their lifestyle and do not want to forgo their new cars every 3 years or the luxury coffee every morning. The stock market tempts everyone with the returns gained in the 90s. The brokerage firms’ marketing campaigns clearly influence that temptation. You could make the same claim of undo influence about companies that market diet regimens and fitness equipment. Bottom line: managing wealth is a difficult task with uncertain results.

    Many people chose to delegate (or at least hire assistance) in their wealth building efforts. These people either don’t have the skills nor do they wish to acquire the skills for stock selection (or any investment selection) or they may not have the time for undertaking this activity.

    Does this delegation lead to abuses especially in an industry with a product that produces uncertain results? As a recovering broker I can state the answer as “Clearly yes.” The financial services industry is one of the most highly regulated industries that exist. Consumers have steps to address these abuses. The industry should also do more to police itself such as educating its workforce and requiring further certification.

    My bottom line is that many people cannot do what it takes to accumulate and protect sufficient wealth on their own. They need guidance especially when the rules change.

    You are very right in that upgrading your human capital is the best investment that someone can make. Many people are stuck in their personal comfort zones.

    Comment by Kevin -

  66. Hey Mark,

    I am not sure if I agree with your viewpoint, in terms of investment, but definitely check out my opinion at my blog:
    http://www.jprotege.com/blog/

    -J

    Comment by J. -

  67. every person has a unique situation. it is hard to give specific advice to people via a blog.

    “same theory holds true when you have to withdraw money from a CD, in that instance you have to withdraw the whole amount, pay a penalty and then start your time period over”

    a CD is not quite analogous to stocks. There is a floor to how much you can lose on a CD. With the stock market, you can lose everything and the comission. A CD is insured by the FDIC (govt) up to a certain amount. The stock market is not insured in the same way.

    Comment by nate -

  68. I think you should put your money where your mouth is and prove it to everyone. I am investing $50 a month into a no-load mutual fund and $50 a month into a ING Direct Savings Account paying 3.5% interest. Maybe you should invest some money in a mutual fund, an etf, a CD, and an interest bearing checking account for a 1-month, 3-month, 6-month, 1 year, 2 year, and 5 year returns and see which one does the best.

    Also as to your comment about losing some of the benefit when you have to withdraw money from your account due to financial hardships, the same theory holds true when you have to withdraw money from a CD, in that instance you have to withdraw the whole amount, pay a penalty and then start your time period over

    Comment by Chris -

  69. current economy possibly not super hot:
    http://simurl.com/cc-aa-ff

    efficient markets?
    http://simurl.com/cc-aa-dd

    Comment by nate -

  70. I’ve read that learning to play the stock market takes three years of time actually playing the market. That means you have to stay in the game for three years, before you even fully know what you are doing! It seems to me that is part of the problem that people have. They lose their money early on. You can’t be too careful.

    I wonder how many really conservative people play the market, nowdays.

    It’s not whether its a good investment. It’s whether most people think it is, that controls the outcome, and that depends upon who is in the market now. That is always the final question I ask. Who is in the market now? After 2000, is the stock market perceived as a high risk endeavor by most people? Is it perceived as a hopeless train wreck by the people who would normally be in the market researching carefully? Has George, my CPA, cashed out his portfolio? And does that influence what type of person is making these decisions to buy a company’s stock when said stock appears to be a high risk investment to me, based upon the financials. Nowdays, is the person reading the financials the exception or the rule?

    You would think that the vast majority of the trades are done every day by institutional investors, and that they would have finance or economics or MBA background, not to mention CFA, but not sure.

    I see alot of profit taking every time there is any general upward movement in the market. There is plenty of fear. I think anyone in the market is inherently worried. It looks that way.

    I believe most people know it’s risky. Even if you do your research well, there are plenty of people who are buying or selling for no good reason that I can see. Those people may get flushed out, but there are plenty more where they came from. The company comes in significantly over estimate for EPS and the stock tanks. Huh?

    I think surviving the first three years is the most difficult part.

    Comment by Haake -

  71. As a former HR Manager, I have seen many lower middle class to middle class folks have to raid their 401k because of “life happening.” As much as I tried to discourage it, many people just don’t have the financial savvy to know the best moves to make with their money, let alone try their hand at playing the market.

    The best stock “picking” advice I ever got was from my accounting professor in grad school. He broke a stock price down to the simple definition of Present value of future cash flows. When you think about it, it makes total sense. Try looking at stock prices based on the present value of their next 10 years estimated future cash flows and you will see that many are dead on. However, you will also find some good stocks to short, and some good ones to go long on. I tried it with one stock (doing other research as well, you don’t want to pick one that is in the middle of a big lawsuit or anything) and doubled my money in 2 years. Granted, you are looking out 10 years, so many have to be held longterm.

    Every person’s profile is different and every situation has a different risk tolerance. The key is to know what yours is, and stay within it. But be sure to educate yourself on all options before jumping head first into something. And you don’t need a broker to educate yourself.

    Comment by Matt Baehr -

  72. The Mario Gabelli webpage is:
    http://www.nytimes.com/2005/09/25/business/25mario.html

    If anyone wants the file, I can e-mail to them. Warren Buffet must be the world’s biggest sucker, turning $100,000 into 42+ billion dollars. Mark, you’re also one of the top suckers in the world too. Taking an idea and turning it into a billion dollars- or in this case, the suckers at Yahoo, who were suckered enough to pay such a high price for your company.

    I was just wondering if you ever read your comments from your blog. If you do, please e-mail me, I’m looking for an internship.

    Comment by Jay -

  73. Mark,

    I think you basically mis-characterize investing and also Warren Buffett.

    Bottom line, there are lot of idiots in the world and consequently some of them will end up running companies. There will also be others who will set up companies to take advantage of idiots.

    On the other hand there are some good honest people in the world, and some of them may have good ideas and set up companies. Investing is all about finding the right people and the right companies [It doesn’t necessarily mean buying a control position]. That is why Warren Buffett often talks about “standing at the plate and not swinging (i.e. investing) until you get a fat pitch down the middle. He is talking about investing in the right comapny run by the right people. Buffett is very very wealthy now and so takes large positions, but he wasn’t able to take such positions when he first started.

    So Mark:

    A. Read your Buffett history, to get that straight–he didn’t start out with control positions for AT LEAST the first DECADE of his investing success.

    and

    B. Your contention that the “Stock market is for suckers…” Only works if you think the world is filled with idiots and/or dishonest people. Is that what you think, that the world is nothing but idiots and dishonest people?

    Comment by Ray Kent -

  74. Suckers are people/customers who are deceived by the company that sold them the product.
    I was a broker for 5 years. Yes there were boileroom operations whose sole purpose was to deceive people to reap financial gain. Yes there are mutual fund managers that have no business managing monopoly money let alone your money. There are excellant brokers out there though. It’s amazing we live by sayings such as it’s up to you to create your own destiny but we leave it up to other people to manage our money ? Do your homework. This is your money and it’s your responbility to educate yourself. Maybe if the public did there wouldn’t be 17,000 mutual funds. You can make money in the market. The problem is you can’t do it by investing in mutual funds. 20 years ago there 500 mutual funds. By 1995 there were 5,000 mutual funds.
    Today we have over 17,000. What are the qualifications to manage money – MBA ?
    The problem is that mutual funds with superior returns bring publicity which creates cash inflow. Money managers have a responsibility to manage in their clients best interests which is impossible. Why ? They are to big. When Vanguard makes a move they are buying a % of the company and this moves the market. What do you do ? Treat investing as a business. Read everything you can get your hands on. I recommend Barrons, Fortune, Forbes, and any newsletter you can get your hands on. Try to learn the psychology behind the market. Be selective with what stocks you invest in. You need to evaluate the following when selecting any stock.
    1)Is the Dow moving ? What is the economy doing ?
    2)What industry is the company in and is that industry moving ?
    3)Evaluate the management. Read Built to Last
    4)What is the product they are selling ? Is it in demand ? Niche product Ex. Motorola, Google, True Religion.
    5)Read everything you can get your hands on including Barrons, Fortune, Forbes.
    6)Make sure you can back up your pick w/more than one positive story from some financial source that doesen’t have a position in the stock. See what the insiders are doing.
    7)Review TheStreet.com., Motley Fool, etc.
    8)Watch Cramer every night.
    9)Evaluate everything that you have used in the information gathering process to evaluate the company your looking at.
    10) Make your purchase.

    Be very selective. Picking stocks isn’t like gambling. You have to be very patient and wait for the opportunity. One opportunity recently was UnderArmour. Great management, great product,etc. Cramer called it. Wait until it pulls back in the low 20’s and then load up. The stock in one month went from 21 to 37.

    Comment by Brian McCafferty -

  75. looks like you’ve read David Denby’s book one too many times….

    Comment by stock junky -

  76. Mark,

    1) The whole post seems to say the stock market in the US is for suckers, but stocks markets exist in most countries many of which do not have an evolved investment banking sector. Would you apply this post to them as well?

    2) Not all stocks pay dividens, but if a company can compound its earnings at a rate greater then the risk free, why should it? Why can’t investors look at how much a company will earn next year per share divide it by the current share price and see if the earnings yield is greater then that of their other options?

    3) What is a more tax-efficient method of a company passing some of its earnings on to shareholders then buybacks?

    4) A great deal of your wealth has been created by the stock market, via selling your company. Do you think had you not taken that money in, someone would have found a better use for it?

    Comment by barry -

  77. Robert. 1. If you buy a low cost index fund it does the same thing as the index. 2. If you buy a basket of stocks roughly correlated to an index irrespective of what gets dropped or not you will approximate the index return irregardless. To say if you had bought and held the original stocks that made up the original basket at any point in time you would have been slaughtered is a gross overstatement and the empirical data does not support it — at least historically.

    This is not to say the stock market is a good or bad investment going forward but you would be hard pressed to show a negative performance of any basket of original stocks over any 30 year rolling period in the last 75 years.

    Comment by Thomas Hawk -

  78. The “Buy and Hold” myth has as its underpinning a big piece of screwy data. Everyone quotes the performances of the indices when promoting the “Buy and Hold” myth. But the fly in that ointment is that the indices are rebalanced periodically to drop the losers from the basket. So if you bought and hold the original stocks that made up the original “basket” at any point of time, you would have gotten slaughtered eventually.

    Comment by Robert Oschler -

  79. I would like to thank both Mark and Thomas for the interesting back and forth and the choice of topic.

    One of my colleagues sent me the original post and I quickly replied to him with the following: “Thanks. Interesting….I don’t agree with it but he makes some good points as well as leaving out critical investment basics such as time horizon, etc… still a good read though”.

    I am from Canada as well and Interest paying investments are taxed at the highest rate. Dividend paying investments are a much better option from a tax perspective as mentioned In Mark’s reply. However, there is still risk. The time horizon helps spread that risk and is a key element. no matter what the personal situation is, everyone has a time horizon. the only factor is how long it is for each person.

    Those with a longer time horizon will be better able to deal with risk. For those who invest, you need to have money available as well as money put aside. That’s where most individuals run into problems. They have a hard time differentiating savings from emergency funds. For these types of individuals, guaranteed investments may make more sense.

    Those who are unable to differentiate may want to consider speaking to an advisor. BTW, for the record, I am not a financial advisor…simply an individual investor. I agree with you (Mark) that a mutual fund representative does not necessarily know better than you and they do unfortunately take their commission. Individuals need to be informed before investing. I have found that those working in retail Bank branches lack a great deal of knowledge when it comes to the stock market and investments. They are educated on their line of products but not necessarily the investment market. People need to be aware of this.

    If you are going to give someone your money to invest with them, do what Mark does. Meet with the representative and make sure you get a long with them before giving them your money. No matter what amount of money you have, you are entitled to a meeting. Yes, those with more money get treated differently…we all know that and that will never change. Regardless, a good advisor will treat you with respect regardless of your wallet.

    That being said, the best thing seems to be to have a balance of Capital Gains, Dividend and Interest bearing Investments.

    Thanks again for the interesting subject and look forward to more of your topics.

    Comment by Christian -

  80. Very interesting to hear a relative insider’s view.

    I noticed that the link you have to the Ponzi scheme definition ends up at Microsoft (apparently they own http://http…)

    Wiki’s page: http://en.wikipedia.org/wiki/Ponzi

    Comment by Andrew McFarlane -

  81. Oh and one final thing. Back to the inevitable need for cash and liquidity, rainy day, etc. For those of us that own homes you can always get a home equity line to hold you over for any short term tragedies. Let your home equity line be your safety net (not to withdraw and spend and abuse by the way) and instead of having all that money sitting around in cash for your rainy day the next 20 years put it in something with better growth potential.

    And speaking of real estate. Now THAT is something I’m really scared of right now. But every American should strive to own their own home.

    Comment by Thomas Hawk -

  82. Oh and one other point. On your interest bearing CDs and the what not you are taxed at full ordinary income rates EVERY year. For many of us that means giving over a third of our investment return to the government. On a buy and hold stock portfolio with a tax loss harvesting strategy as outlined above your taxes are zero on your unrealized capital gains each year. In fact you get the benefit of a $3,000 DEDUCTION each year. And your dividends (what little of them there are) are taxed at a more advantageous 15% dividend rate vs. ordinary income. And (at least under present tax law) when you do realize that large built up gain over the next 20 or 30 years you would not only be receiveing a great tax deferral but you’d be eventually realizing your gain (again based on tax law today) at a more tax advantaged 15% rate.

    Comment by Thomas Hawk -

  83. Thanks for replying Mark and I appreciate your thoughts very much. The good news is that hopefully you and I both will be around in 20 years and we will be able to revisit this post and review the results of having invested money in a low cost diversified basket of stocks vs. short-term interest bearing accounts. Heck for kicks we’ll come back in revisit it in five years even though five years is more luck than investing.

    I do honestly believe that if two people invested an equal amount of money in any of several diversified approaches to the stock market vs. ordinary interest bearing products that in 20 years the one with the stock market investment will come out ahead. Certainly there is loads of statistical evidence that will show that this has historically been the case, but as well all know past performance is not indication of future results and as such we must look forward.

    In your post you say, “You can have as long a term horizon as you want, but like most other long term plans we have, most peoples lives don’t match up to their “horizons”. It’s amazing how life intervenes. Kids, whatever. its a fortunate few that can just shell it away and never touch it. Your “horizon” hits a dead end when you have to put money into a checking account.” How very right you are. But also how very wrong you are as well. Every year millions of people die and leave money to their heirs. Ordinary middle class people die with money in their IRAs every single year.

    The truth is that most middle class working people never do completely run out of money. They never hit rock bottom. Although some do, most never invade their IRAs and 401ks and many will in fact either use these funds for their actual retirement or end up leaving them to their heirs. Most of us are hard wired to survive and rather than actually run out of money we will change our lifestyle, budget, etc. — most of us.

    Even with kids, many of us save through 529 college savings plans, invest money away for our children’s future college education, still save for retirement and work to build more for the future.

    Perhaps the biggest danger to one’s long term financial health is an over concern about the need for short-term liquidity. The fear that, as you write, we will need to put our long term money into our checking account any day drives millions of Americans each year to keep money in low interest bearing accounts (much to the pleasure of the banking establishment) for that inevitable rainy day when they will need the money. For many of us that rainy day never comes. For most of us actually that rainy day never comes unless we have serious financial hardship near the end of our lives when we can no longer work.

    When you invest in the stock market you are not investing in a ponzi scheme, you are investing in businesses. You are investing in (hopefully) smart management teams building products or offering services that people will need and want and doing so profitably. Despite the rash of unprofitable companies coming to market and failing earlier this decade, most companies in the S&P 500 do actually make money.

    Perhaps the most basic gauge of the valuation of these businesses is the Price to Earnings ratio. Over the course of the last 20 years, the Price to Earnings ratio on the Standard & Poor’s 500 has averaged roughly 22.96. That is to say that most large stocks have been valued at roughly 23 times what they earn each year. The high on the P/E ratio was on March 29, 2002 when it was at 62.74. The low was on November 30th 1988 when stocks traded at 11.59 times earnings. At present the P/E ratio on stocks based on last year’s earnings sits at 18.47. Based on next year’s perhaps overly optimistic estimates the P/E ratio on the S&P 500 sits at 16.62. These ratios are on the lower rather than the higher side of the 20 year average.

    You mention Warren Buffett by the way. And yes, it would be nice if we had the kind of capital that Buffett did and could open the business doors and opportunities that he can. More than anything though the key to Warren’s success was the fact that he loaded up on the stock market when the P/E ratio of the market was low. When the P/E on the S&P 500 was at six in December of 1974, whooo hooo, what a time to buy! By the way, if you want to invest alongside Buffett (and not a bad strategy by the way) it’s pretty easy actually. Where is $42 billion plus of Buffett’s money today? In Berkshire Hathaway stock (a reasonably diversified baskets of among other things common stocks). Even if at $89,990 per share his class A shares are too expensive for you to buy, you can still buy his class B shares (which will provide an approximate return) for about $2,985 per share — and it’s ok to buy even only one share.

    You ask, “Lets say you buy into what the brokerages and funds are selling. Buy and hold, or whatever. How do you pick from the 17k funds ? By reading some websites ? By talking to some friends ? By watching the commercials ? By selecting among the options your company gives you in their plan ?”

    This is a very good question. There are several low cost ways to invest in the stock market. Vanguard has a wide variety of low cost index stock funds that allow you to buy the market. The Vanguard Total Stock Market Index is one place to consider. Recent offerings by iShares also offering comparable low cost ETFs. Perhaps the best strategy though (if you have a large enough nest egg to use it) is to simply collect, buy, and hold a widely diversified portfolio of common stocks. Your stock portfolio should be roughly representative of the sector and market cap weightings of the total stock market and no any one individual position should represent more than 4% of your portfolio. When energy stocks run up and energy becomes overweighted in your portfolio, don’t put any more money in energy stocks until it become underweighted again. Instead look for what’s been down and add your new investing dollars and capital there.

    Why is it to your advantage to own an individual stock portfolio over a low cost index fund or ETF? Because you can manage the portfolio for tax advantage better and also a zero management fee is even better than a super low management fee (such as the 16 basis point fee that Vanguard charges on their flagship S&P 500 fund). If you follow a buy and hold strategy your commission expenses will be minimal and there are many places to get discounted commissions yet today.

    The tax advantage is derived in a couple of ways. Rule number one. If you buy a stock in your IRA or 401k don’t sell it until you have less than 10 years before you’ll be spending the money. True buy and hold. For every stock that you buy that crashes and burns another that you buy will truly surprise you with a 400% return. Don’t try to be smart and outpick the market just hang on.

    With your taxable account on the other hand, sell every stock that you lose 10% or more in — irrespective of how you feel about its prospects going forward (remember, we are buying markets and need to avoid human emotion). By systematically selling your stocks when they decline 10% you will effectively be tax loss harvesting your losses. At present you can deduct $3,000 a year on your tax return every year (that never expires) that you have losses to use and you can also push these losses forward to future years when you will eventually begin selling off your stock portfolio to take the money out and live on it.

    Your stocks that don’t decline 10% in your taxable account? Begin selling them as you will need the money in the next 10 years. In effect what you will done is built a giant tax deferred portfolio giving yourself a $3,000 yearly income tax deduction from your losses. (unrealized gains are not taxed until you realize them). Of course if positions begin to do so well that they become greater than 4% of your total portfolio the

    Comment by Thomas Hawk -

  84. Mark, what are your thoughts on Graham & Dodd-style value investing as a methodology for finding new investments?

    Comment by Alexander Barbara -

  85. Mark, why do you put a space before your commas and question marks?

    Comment by Larry Chi -

  86. Mark –

    What about us poor suckers who work for a company that does a ‘match’ on the first 5% of the money we invest in our 401k? I am immediately vested because I have over 5 years and they add 4% to my 5% invested. I feel like that is a good deal because I make 80% right from the start, even though it winds up in my choice of those funds sold to my company.

    Comment by Cathy Morris -

  87. Although I agree with much of what you said in this post, especially concerning fund and fund manager churn, I’m a little more skeptical when it comes to the indexes. The DJIA is a bit of a joke, but its components don’t change *that* often. And my understanding is that the S&P 500 is essentially self-defining, since its constituents are, for the most part, the largest 500 companies. Yes, the definition of “largest” can be a bit fluid, but I think you know what I mean.

    However, one thing I didn’t see you address were broad indices and their associated funds, such as the Total Stock Market Index, or Wilshire 5000, or whatever you want to call it. When you talk about an index that big, it gets more difficult to fudge the numbers. And when you combine that with a fund company like Vanguard, who offer almost exclusively no-load and low expense ratio funds, I think you have to give that kind of investment vehicle a thumbs up as the sanest way for individuals who can’t purchase significant chunks of individual companies and who are willing to take a little risk to make better than 4-5% (not much more than inflation!) on their money. Even real estate, IN AGGREGATE and over the long term, only returns 2-3% per year (if I remember correctly, see “Irrational Exuberance, Second Edition”).

    So, aren’t broad index funds with no load charges and low expense ratios a reasonable place for normal people to invest?

    Comment by Rob -

  88. Jon: 3.8% interest is negative in real terms after taxes and inflation.

    Brock: Unless you’re looking at real estate in Japan, this probably not the best time to invest your money in that market…

    Jason: I think you’re right on the money. This rant works as an argument against putting all of your money in the stock market, and against investing in stocks of companies you know nothing about, but doesn’t mention the role of diversification. I recommend John Allen Paulos’ _A Mathematician Plays the Stock Market_…

    Comment by Jim Lippard -

  89. Forgive me for the “stock market is gambling” line but I think it applies here. When I go to AC and play low states tables I usually do pretty well. Sometimes I lose but not often. Why? Because I’ve probably read 1000 pages of hold ’em strategy, played in a lot of table games and house games, and just sat around and thought about the game so I could find out what worked and what didn’t work. When I sit at a table, I have such an advantage over the people who saw Rounders for the first time that it’s not even funny. And the thing is, I’m not even that good. There are people who are so much better that my best bet is to leave the table and find a table full of suckers, just like a fund jumping managers do. I think this is Mark’s point about the markets. If you don’t put the time in, lots of time in, more time than you think you’ll ever need to, then you are not going to do well. In the meantime ING Direct gives 3.8% on a regular SAVINGS account and the way it’s been going it’ll be at…well, if I say what I think I’ll sound like a shyster. 3.8% for doing nothing and I can get it whenever I want is pretty good. I’ll take that for now.

    Comment by Jon -

  90. Someone call the authorities because Patrick Byrne has taken over Mark Cuban’s blog.

    In all seriousness though, while there are some very good points made in this rant it is a bit of a zealous argument. Mark apparently forgets that the companies marketing the CD’s he recommends are also ‘for profit’ enterprises. He also fails to address the impact of inflation on the 4% returns in the vehicles he is recommending.

    Mark, whenever someone points out the price of tickets are too high for most of the *real* NBA fans you always point to the value priced tickets in the upper deck. The stock market too has value priced securities which most often are run by very good management teams who pay dividends consistently.

    If one cannot afford the risks of the glamour securities there asre still literally hundreds of good solid investment opportunities in the stock market.

    Comment by John -

  91. One of the stunningly dishonest things I’m always hearing is from salesmen who tell me that the stockmarket has returned an average of 12%/year and then tell me what $1000 would be over 20 years with 12%/year compounding…

    Even if we ignore the fact that the 12% includes dividends which have historically been much higher, and we ignore inflation and fees, this is still incredibly misleading. Calculating compounding interest in this way assumes a constant 12%, which the stockmarket decidedly is not.

    Financial advisors who don’t know the difference between arithmetic averaging and geometric averaging should be charged with fraud.

    Comment by toby -

  92. Mark, I think you should also consider the huge impact the government has made in selling the stock market. I am in Canada and here a huge amount of mutual fund investing is made in vehicles called RRSPs. These are basically investments in funds that are tax-deductible and IMO is the gov’t subsidising the stock market and financial services industry. Without this, the amount of $$ thrown into funds would drop dramatically. Not sure but i think this is like a 401k in the US.

    Comment by Tom -

  93. I know you’ve harped on this before, but I’m pretty disappointed every time I hear it. Not just because it flies in the face of empirical evidence, but because it seems like the product of a disdainful billionaire who no longer can identify with ordinary people who need a vehicle for saving what they can, compounding its growth over time, and eventually having something to send a kid to college with. And before you say CD’s, just stop. 4% doesn’t cut it.

    In regards to your comments about stockbrokers, mutual fund managers, etc, I think you’re right on the money. Just don’t throw out the baby with the bath water.

    Comment by Carter -

  94. Thanks for your insights. You present a compelling case for how the stock market has transformed over time. It is interesting how everybody still parrots the old line about the stock market, but its modern incarnation is far removed from its initial purpose. As a young guy who is finally starting to make enough money to save/invest some of it, I’ve got some big decisions to make.

    Right now, I am looking into real estate. I guess one of my main concerns is the fact that the dollar doesn’t really mean anything. $1M could be the price of a pack of gum in 10 years for all we know. It’s happened before, it could happen again. All of a sudden, $1M in a bank somewhere doesn’t seem so appealing any more. I visited Germany in summer 2001. At that point, the Euro was just below $0.90. Now the Euro is at $1.20. That’s a 33% drop in my income, my bank account, my investments that are valued in dollars. Real estate seems to be the best investment that will hold its value despite the ups and downs of currency. The only thing that will cause huge declines in the value of land is a huge decline in the size of the population…. which, if that happens, I probably will have more to worry about than my investments.

    Anyway, as I said, I’m still young and I have a lot to think about in terms of where I will put my money in the years to come. I appreciate that you share your thoughts, which are quite different from what I hear everywhere else. Thanks for being a Maverick and providing a different perspective.

    Comment by Brock -

  95. I’m sensing a little hostility. Not just this post, but from pretty much all of your posts over the past few weeks. Cheer up Mark. Life’s to short to be angry at someone all the time. Tell us about your favorite Mav win.

    Comment by Taylor -

  96. Wow. This is one of your best blogs, Mark. Right up there with the detailed blog entry about Nash leaving the Mavs for more money. Thanks for the insight. And my 20-year-later version of myself (and “his” future net worth) thanks you also!

    Also, what did you think about the Mavericks coming in #5 in Forbes recent rankings of NBA team franchise values? God job in making the quote in your last paragraph come true.

    Comment by greg -

  97. Mr Cuban, Empirical evidence simply doesn’t support this claim. Holding an index over long periods of time (>20yrs) has produced massive returns. Because of this upward drift, the “random withdrawal” argument if tested would therefore not show stocks to be inferior (without additional assumptions that would make the argument unnecessary).

    But, ok, forget history (the empirical).. and for the sake of argument i’ll even grant that stocks are a ponzi scheme and operate on money flow logic extrinsic to earnings. The population of the earth is still growing and a lot of it has yet to be integrated into capitalism. This represents new business, new wealth and new shareholders. At the same time the average lifespan is going higher, which means even more accumulated savings, and only so much of that money can go into fixed-income because real yields will approach zero, making stocks attractive. New technology is another factor that favors equities. I don’t anticipate that technological developments will stop anytime soon.

    Lastly, no-one is arguing that all of someone’s money should be in stocks, but it sounds like you’re saying that no money should be allocated to stocks unless someone’s willing to make a part-time job of it???

    Comment by Jason Ruspini -

  98. Mark,
    Thanks for the truth. Too many people have blind faith in stock brokers, fund managers and the like. It’s truly sad to see older folks trust these people who definately are looking out for themselves first and always. I’m hoping to get your take on real estate investing.I have been focusing on this for some time for the reason that I can see my investment and can do something to change a given situation by being the CEO of MY investment. Thanks again for your blog. Take care, Frank

    Comment by Frank Morales -

  99. Mark,

    I think a better headline would be:
    “The stock market is for the informed.”

    The average person is certainly “dumb money,” but the average person can do far better than throwing their hard-earned cash in a bank if he or she invests their own time and doesn’t simply buy into the B.S. offered by the major mutual funds and brokerages.

    As a trader, I see everyday how there is plently of money to be made over the short-term for those who are willing to put in the work. Those who simply take other’s advice when making a major investment (like any other major purchase in life) will be far more likely to become the suckers you mentioned.

    Great blog, Mark. I always enjoy your perspective.

    Comment by David -

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