Opinion - The Stock Market, a Never-ending Ponzi Scheme
By Stefano Treviso, Updated on: Apr 07 2023.
This is definitely one of the most fun articles I'll get to write in my whole career as a website owner in the space of finance.
First of all, don’t get me wrong, I love the stock market, I love trading, I’m passionate about market dynamics and the ruthlessness of the game, yet, that doesn’t mean that I blind myself to the truth of how things work and precisely because of this, I’m able to see things in a different perspective and also share those insights with our audience to somehow help them have a better chance in the game.
Let’s start with a bold statement:
The stock market has only one direction, UP.
If you’re wondering how I say something like this well, take a look at the below chart:
Forget everything the news says, forget the “bear markets”, forget “flash crashes”, forget COVID-19. It really doesn’t matter. The market needs to keep going up and there are some “hairy hands in the background” ensuring it stays that way. Before we get into the logics behind this daring opinion piece, let’s go over some important pieces of knowledge:
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Ponzi Schemes, how do they work?
Charles Ponzi was the italian con artist that made pyramid schemes a well-known scam. While it is true he did not invent them, for sure he took them to the highest level in his times.
The whole scam consisted of presenting a business opportunity where investors were offered a 50% profit on their investments in 45 days or a 100% profit in 90 days. The “so called” strategy was buying postal reply coupons at a discount and redeeming them at a higher value in the U.S. Of course, none of this was actually happening in the background, here’s what really happened:
- One investor drops $1,000 expecting to receive $1,500 in 45 days
- The scammer, in this case Charles Ponzi, has 45 days to find a new investor that brings in another $1,000 from which he will pay the first investor the $500 promised profit.
- In some cases, the con artist can only pay profits and keep the funds “invested” or he can also pay the full amount with the intention of getting its victims to invest more.
The problem with this “clever” approach, is that it's always meant to collapse leaving the latest investors in the scheme completely broke as the money was already swallowed up the pyramid by the initial con artists.
There are many interesting articles about this type of scam, especially the ones belonging to governmental institutions such as the SEC in the U.S.A, where they mention that pyramid schemes always collapse as in order to keep them going on in the United States, you would require a population far larger than the whole planet’s.
So, where is the link between Ponzi and the stock market
Well, it all starts by the reason financial trading exists in the first place:
Speculation.
Speculating is when we take actions based on belief rather than on solid facts, for example: If I decide that Apple’s stock is overpriced and I think it’s meant to fall down in price, regardless of the fundamentals, I’m speculating on Apple's stock price.
This means that even if a stock is completely worthless or useless, all it takes is some powerful hands to maintain the course of its price or pump it up.
Take as an example GameStop’s stock (GME). A company that according to Motley Fool’s article, has been dropping it’s revenue over the last 10 years at a 6% annual compounded rate.
Despite the fundamentals being weak, the stock rose over 900% in 2020, only because retail traders simply went nuts and decided to take long positions on it to purely speculate and short squeeze major hedge funds.
This simply shows you that the stock market is not a fair or logical game, it’s a jungle and in every jungle there is an Apex predator at the top of the food chain, in the particular case of the financial markets, it's the governments, central banks and hedge funds.
All these institutions want to keep an eternally healthy and ever growing stock market, to ensure continuity of power and at the same time keep a great part of the population happy. To start our logical train of thoughts, let’s ask ourselves the following questions:
- If you buy a stock, do you intend to hold it forever or to eventually cash out and if so, when?
The most logical answers to this questions for the average citizen that invested in stocks or funds, would be:
- To cash out at a later age in order to enjoy a nice retirement
- Cashing out during an emergency time where funds are needed (this one is considered a special occasion, not a standard)
- To pass-on part of your equity as inheritance to your descendants
Now, let me ask you a question, if the old generation buys, waits 50 years to sell, then, to whom are they selling?
The young generation - enter the Ponzi logistics.
The stock market is an eternal product of complex financial manoeuvres, speculation and the dark hand of monster financial institutions doing their best to keep the climb happening, no matter the cost.
Under no circumstances, any trader or investor intends to keep holding forever. Everyone wants to realise profits at some point and that is exactly how everything works. There is a constant changing of hands when it comes to money, so the only thing a government needs is to make sure people keep buying.
It doesn’t matter how dark the circumstances are, the government intervenes if necessary and out of nowhere, the Federal Reserve activates a massive buyback program and pumps the S&P 500 to the sky in a matter of seconds.
And what if it gets too expensive? - Enter stock splits
The first thought that must have come to your mind is: well, if it always goes up, how the hell am I supposed to be able to afford an AMZN share in the future if right now the price is $3.224,28?
Well, time to relax. Stock splits are there to favour the psychological appearance of a stock and make it “less expensive” for the average investor.
Suppose that a company has 100 shares at a price of $100 each. If they decide to perform a stock-split, all they need to do is recall their old shares and issue 200 shares at a price of $50 and exchange them proportionally with their investors so they end up having the same dollar value.
Wait, but what happened?
Well…. If before you had 6 shares worth $600, now you have 12 shares which are also worth $600. They just changed the value.
And how can this be good?
Well, if before there were many investors unable to afford your expensive $100 share, now for sure you’re opening yourself up to a new clientele by having a cheaper “better looking” share.
Other companies choose to keep their share price to only allow powerful investors to buy-in, take for instance Berkshire Hathaway’s class A stock, currently worth $495,750 at the time of writing this article. Clearly, they don’t want the average joe to have any control over the business.
Connecting the dots
Now it's time to put it all together. Why do I consider the stock market to be the best Ponzi Scheme ever built?
Well, here’s why:
- We take the money of new investors to buy and pay the old ones
- We have an unlimited amount of customers meeting anonymously
- We can change the rules whenever we want, we can make it look cheap or expensive
- Fundamentals and logics can be overridden by fear, impulse, irrationality
- If a big guy messes up (a hedge fund, bank, etc) the government will bail them out quickly
See how crazy it sounds?
Now, here comes the best part of this. Do I want it to change?
Not at all!!
I want to keep the party rocking as long as possible. I want you to learn about the inner dynamics of the game, enjoy it, profit from it and never get emotional about it.
You’re not here at TheTradingBible.com to take spiritual lessons on how to be pure from me, you’re here most likely because you had a question related to trading and you want to make money.
The most important thing you should never forget is that the stock market has crashed several times in large percentages, sometimes even up to 50% over a certain period of time, but the main trend is for it to continue rising as a whole. We’re not making reference to specific companies, but rather the overall direction of the stock market.
Unless there is a worldwide nuclear war or an apocalyptic event, it’s very unlikely to see a complete and total destruction beyond recovery of the stock market, hell, even if a small nuclear war happens between two Asian countries, the stock market will likely show:
- A negative effect on companies that depend on those markets (digital services, transportation, food, agriculture)
- A positive effect on companies that provide military technology, defense systems, etc.
See?
It’s all a never-ending game of money spinning around and like someone very wise told me once:
Money just changes hands, make sure some of it goes in your pocket.
Good luck!