'The Ponzi Factor' is a short book which is written to rationalise and justify the author's assertion that the stock market, as currently operated is really a gigantic ponzi. He bases this on the fact that an equities value is usually only a reflection of what another investor will pay for it and has no relation to the performance of the underlying business. The only caveat is that if a share pays a dividend, then this is less true as money from the business is introduced into total returns.

Tan is based in the US so his benchmark S&P is much less likely to pay dividends than the FTSE. Currently the yield on the S&P is around half that of London as many of the stars of the American stock market don't pay a dividend, indeed for many this is explicit policy. Tan uses the performance of Google and Tesla to illustrate the ponzi nature of stock investing. Google has made huge sums of money that it keeps in it's company accounts but will not pay to stock holders. He points out that between 2007 and 2011 where the company reported profits of $28bn, the stock price started and ended this period the same where as Tesla over the period from 2010 and 2017 reported losses of $4.3bn but the share price went up by nearly 20 times. It is difficult therefore to justify any direct, demonstrable correlation between business performance and stock price, we have to concede that the price is more based on emotions like 'expectation'.

Logically speaking, investing should be based on rational and sensible expectations of a return on that investment. If someone approached you to borrow money for their new business but all you get, and were ever going to get was a piece of paper saying the value of that paper was £0.01, I think most sane 'investors' would walk away from that deal. Tan makes the point that if an investments value is only determined by future investors and not the performance of the underlying company it can be thought of as a ponzi and not investing in the more honest sense.

Raising capital through equities means initial investors give money through brokers and banks to the company accounts for expansion or other capital needs. This money is then spent or held within the companies own accounts…

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