“I rarely think the market is right. I believe non-dividend stocks aren’t much more than baseball cards. They are worth what you can convince someone to pay for it”. ~ Mark Cuban
Here’s a deliberately controversial and provocative perspective: There are good reasons why equity markets, in their current form, need to be eliminated. Some of these are:
- Less than 1% of the world’s population actually owns any equity. Disproportionate media attention is focused on Wall Street and other stock markets across the globe, at the cost of more productive activity.
- The financial industry’s primary reason for existence – efficient capital allocation – has been exposed as a myth in the meltdown. Innovations in financial services are not focused on delivering more capital to productive activities. Instead, debt is sliced and diced to create multiple transactions out of the underlying debt – increasing deals and commissions but not leading to new capital.
- Similarly, trading a company’s equity on a daily basis does not bring the company fresh capital -the same equity changes hands and only the brokers get rich. The only purpose it serves, if and when it works, is price discovery.
- Everyday people have no clue about stock prices – most buy after prices have risen and sell when prices are bottoming. For most everyday people, who have little knowledge of the markets, buying stocks is akin to gambling.
The so-called experts aren’t much better – they just have more money and more discipline to get in and get out ahead of the crowd. There is no justification for an investment banker earning many times the salary of a plant manager, a sales manager or a branch manager on Main Street.
- Stock prices are artificially inflated by the markets. Stocks should be valued only by what they earn – their dividends. Otherwise, it is like valuing land at more than its rental value.
The idea of a joint stock company, popularized by British shipping ventures, is outdated. Venture capitalists fill that role today, allowing rich people to make risky investments for a chance at enormous payoffs.
We need to put more emphasis on traditional businesses, family owned, operated as partnerships or proprietorship firms, with unlimited liability. Those firms traditionally access debt from private sources or banks; managers are personally accountable, and run their companies with more discipline and oversight.
Small investors like to think of themselves as part owners when they buy shares. This is a myth perpetuated by companies, banks and the media. The fact is that owning hundred shares, or even a million shares, of a company will not fetch one even an ounce of a say in how that company is run, or how that company keeps getting merged and demerged.
The shareholder is at best a supplier of money. The stock goes up and down and changes hands, but none of those transactions have any direct impact over the functioning or finances of the company.
We need a clear distinction between venture capitalists – who understand the risks and the returns related to their equity investments – and normal investors who are better served by debentures and bonds that offer predictable returns. Further, valuations of companies should reflect dividend yields rather than hopes about future growth or profitability.
Daniel Kalenov Global Diversified Partners is an investment firm of choice for individuals seeking to diversify their portfolios into tangible assets. We help people take control of their financial well being by educating them on the benefits of investing in tangible assets and by altering their perception of what “smart investing” means. Call us 619-500-4235 today!
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