A Ponzi scheme is a fraudulent investing scam that generates returns for earlier investors with money taken from later investors. Other than the fraudulent part, isn’t that what the stock market is? It’s an investment scam where an investor’s success depends on investors coming in later and investing at a higher price.
“The stock market is by definition a Ponzi scheme.” – Mark Cuban.
The stock market is the largest and longest-running Ponzi scheme ever. That is just a fact. For instance, when retail investors pay $2,000 for a share of Amazon, how are they getting a return on investment when it clearly provides no dividend? The early investors are getting paid from the last investors in a classic first investor-in, first investors-out Ponzi scheme-like manner. This same principle holds true for every publicly traded investment (e.g., Facebook, Netflix, Tesla, Walmart, etc.)
A Ponzi scheme is unsustainable and, at some point, will collapse as the number of later investors is insufficient to support the promised distributions to all the earlier investors. With stocks, the prices will climb and climb (i.e., a bubble) as more and more investors come in, but at some point, there will no longer be investors willing to pay the higher prices. With no new takers, investors underneath will liquidate before the stock bottoms out. And just like a Ponzi scheme, it’s the investors who came in later who will end up suffering the biggest losses.
Why do Americans play the stock market game that is essentially a legal Ponzi scheme?
Maybe it’s hardwired in their psyches by the constant press and attention paid to the stock market, making Americans believe it is the best place to invest. Unfortunately, Wall Street understands that it’s the default choice for Americans when it comes to investing. And by teaming up with Corporate America, it keeps sucking more and more investors in until the bubble bursts every now and then.
How does Wall Street team with Corporate America? Through a 401(k).
Americans continue to invest in a 401(k) because it’s easy and convenient. All you have to do is choose a particular fund or name your strategy (i.e., capital preservation, growth, etc.), and a fund will be suggested. The money comes directly out of your check and often with employer matching.
What could go wrong? Everything. Just look at the Financial Crisis of 2008. When your retirement depends on everyone else putting money into the market or on everyone else not pulling out, you’re playing Russian Roulette. Many retirees were on the losing end in 2008 amid the Financial Crisis when the stock market plunged. Some people went from preparing to retire to have to keep working for years beyond what they had planned because of the money they lost when the stock market shed half its value.
Why be part of a Ponzi scheme? Why depend on a scheme like the stock market for your retirement or financial future?
Smart ultra-wealthy investors don’t play the Ponzi game; they take control of their money instead of leaving it to chance. Beginners don’t play in the same sandbox that everyone else is conditioned to play in. They refused the Kool-Aid and found their fortunes in private alternatives instead of public equities.
The problem the ultra-wealthy have with the stock market is that it’s based on the greater fool theory, which says that making money depends on a greater fool paying a higher price down the road than what you bought it for. The problem is stock prices are completely arbitrary – typically having nothing to do with underlying economic performance or sound financial principles. Instead, prices depend wholly on investor sentiment – social media and the news cycle drive emotions.
The ultra-wealthy prefer to invest in assets grounded in data and numbers because they’re not interested in speculating and hoping that a greater fool down the road pays more than what they paid.
The ultra-wealthy don’t play the timing game. They have different investing goals than mainstream investors. Their goals are:
- Passive Income.
- Appreciation.
- Tangible Asset.
- Capital Preservation.
- Tax Benefits.
- Insulation from Volatility and Inflation.
- Multigenerational Wealth.
Because they have higher goals than the average investor, they are more informed about where they place their money. They rely on numbers, data, due diligence, and access to managers/promoters to analyze a particular opportunity’s viability. They refuse to deal with arbitrariness and randomness. That’s why they prefer private alternatives over public stocks.
Why leave your retirement to chance and to what is essentially a legal Ponzi scheme?
Why not consider tangible private alternative investments like cash-flowing real estate and productive private businesses (private equity) that offer passive cash flow and reliable appreciation – all backed by a hard asset and insulated from Wall Street volatility?
That’s why the wealthy are heavily allocated to income-producing private alternatives. They’re reliable assets for building and generating long-term wealth – ones rooted in sound financial principles and not irrational investor sentiment.
Kyle Jones is a co-founder and Key Principal of TruePoint Capital, LLC. Kyle is responsible for the company’s strategic planning, investment decisions, asset management, and overseeing all aspects of the company’s financial activities, operations, and investor relations.
Kyle obtained a Bachelor of Science degree from Texas State University – San Marcos, where he also played Division 1 Baseball.
