I was reviewing some posts on Mark Cuban's site this morning. He's an interesting guy with real world experience. I used to follow his blog closely but a lot of it doesn't necessarily interest me. Anyway, I'm really interested in his investment philosophy and his talking stocks and money section.
In short, he feels that the current stock market is a Ponzi scheme. Charles Ponzi came up with a brilliant plan to fleece. He got the first group to invest and then paid the first group of investors off with money from a second group. The second group saw how much the first group got and this encouraged a 3rd and 4th. You get the picture.
Why Are Stock Market Investors Getting Ripped Off?
- Stock Options
- No Dividends
- Stock Buybacks
Stock Options
Management grants themselves stocks options. A stock option grants you a right to buy stock at a certain price (the strike price). So not only can management issue itself more stock, diluting the value of the shares already outstanding but they can also make the company subsidize the cost.
If the strike price of the option is $5 and the current price of the stock on the exchange is $10, an option holder can buy the stock from the company for $5, increasing the number of shares outstanding and diluting earnings per share. The share is then sold for $10, bringing a profit of $5. However, if there are enough options granted the exercise of enough options can drive the price of the stock down.
Stock Options are poison to shareholders. They allow management to extract wealth from the company at the direct expense (and detriment) of the current shareholders. Large shareholders (institutional investors) may be able to put a stop to this nonsense. However, small investors (you and me) are going to get screwed as our shares are often owned through mutual fund. We don't have a direct voice or enough power to look out for our own interests. It really is a case of the little guy getting screwed.
Why do you think Warren Buffet buys large shares of companies, if not a controlling interest. Buffet's not going to stand for this kind of crap in his investments (except maybe at Wells Fargo). However, most of us aren't as savvy as Buffet and will end up getting shafted.
I'll talk about the lack of dividends and stock buybacks in my next 2 posts.
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