The Problem with Ponzis
adventuresincapitalism.com
adventuresincapitalism.com
And when the pump and dump never ends, generation after generation, that's money.
Kind of like the difference between a cult and a religion.
In a cult, there's one person who knows it's all bullshit. In a religion, that person is dead.
The difference is time and self sustainability.
> A Ponzi scheme is a form of fraud that lures investors and pays profits to earlier investors with funds from more recent investors. The scheme leads victims to believe that profits are coming from legitimate business activity (e.g., product sales or successful investments), and they remain unaware that other investors are the source of funds.
Sounds pretty Ponzi-like to me, even if that's not the intended mechanism of the company. I would agree that a literal, correct Ponzi scheme would involve no plausible way to make operational profits.
I think pump-and-dump is actually further from the dynamic the author is describing. Although pump-and-dumps don't absolutely have to be short-term, they tend to be.
From https://en.wikipedia.org/wiki/Pump_and_dump#Comparison_with_...:
> - Ponzi schemes typically come with the expectation of profit over a relatively-extended period of time and typically last for months, years or even decades before their inevitable collapse. By comparison, pump and dump scams are designed to make profits extremely quickly and are executed over a period of weeks, days or even hours.
> - Ponzi schemes are occasionally the result of investment vehicles that are originally intended to be legitimate but ultimately fail to perform as expected. By comparison, pump and dump schemes are invariably intended to be scams from their conception, although a fairly common tactic employed by pump and dump schemers is to take over a once-legitimate business (one that is either failing or defunct), or even just its name, in order to pump and dump its stock.
The reason the difference is important is because if you we understand what a Ponzi scheme really is, we won't be able to identify them and prosecute them. Claiming that "everything is a ponzi scheme" is actively harmful.
Just because a scheme is legal under current laws does not mean it is not a Ponzi or Ponzi-adjacent.
This is more like the dotcom days or trying to be like Amazon - the founders really think they can grow the business into something profitable, but for whatever reason wildly miscalculate the trajectory. The founders are going to ride it right into the ground (or until they get the boot)
This isn't the Ponzi dynamic. Full stop. In a Ponzi scheme, early investors suffer just as much as later investors if they never cash out.
"Buy low sell high" (and the reverse) is not the Ponzi dynamic. Speculative asset bubbles do not require continual new investment. They are essentially zero sum games, and if they are traded thinly enough, can be propped up by a tiny band of holders (or even a single trader doing wash trades!).
Ponzi schemes are frauds, but not all frauds are Ponzi schemes.
It is not
* speculation or "asset bubbles" (I don't believe in bubbles, but they are definitely not Ponzi schemes)
* MLM / pyramid schemes (although these can also be Ponzi schemes, usually when the promised levels of operational support, marketing, product dev, etc. aren't honored)
* pump and dump / option manipulation ( these can be fraudulent, but they're not Ponzi schemes - they don't require a steady flow of investors to sustain themselves - in fact, one large institutional investor can be sufficient)
More than "Ponzi stocks", though, in the present day and age I really feel these are just basically just a type of meme stock. I define a meme stock as one where investors are chasing momentum where they know it will eventually crash, but they're really just betting they'll be able to get out before everyone else. Hertz was perhaps the most famous example, where the stock was bid up even though it was already in bankruptcy proceedings and was inevitably going to $0.
This is the thing that I feel has pretty fundamentally changed in stock investing in the last ~5 or so years. During the original .com boom, many investors really did believe all those worthless .coms would eventually make a profit (and, indeed, many of those .coms were just too early - Pets.com famously crashed and burned, but Chewie is a multi-billion dollar business). But these days I feel like there is a new type of speculation, more like video gaming, where hardly anyone believes a particular company has good long term potential at a sky-high valuation, but that if there is a chance a stock can be pumped on wallstreetbets et al long enough that there is a valid short term play.
Hertz shareholders did receive a material payout after Apollo's debtor-in-possession takeover of the company. https://www.wsj.com/articles/hertzs-complex-shareholder-payo...
Hertz common stock is currently worth more than $11 billion, virtually unchanged from a year ago.
Clearly, there's nothing "inevitable" about bankruptcy proceedings.
From https://www.barrons.com/articles/cathie-wood-ark-invest-shor...
That said, this is a good article and definitely presages bad times ahead for growth stocks. Not just the unprofitable ones. (I've been modestly cycling out of growth and into value and cyclicals.)
Any advice on stocks to short?
I believe the S&P 500 index actually broke their own rules by not adding TSLA in the quarter it should have been added. I imagine the people in charge of the index were incredulous about it's insane value rise and questionable profitability.
Then again, the risk you take by using an index that excludes these kinds of companies, is that you miss out on the next AMZN until it's fully valued.
Just VTI and chill.
But you might be better off finding a value-oriented ETF that simply excludes high-multiple growth stocks. Blue chips and dividend stocks, perhaps. But this is very simplified advice. You may want to buy a couple hours of a fiduciary advisor's time if you want to seriously pursue that strategy.
Most folks will simply ride the top x-hundred companies, let their returns get padded in the good times and take the drag in the bad times as growth stocks rise and fall. Over decades, this strategy backtests pretty well.
TLDR: Ponzi schemes are bad and unwind quickly. They can take the form of "normal companies". Peloton being one example (according to the author).
What's more interesting to me is just because a company may be a Ponzi scheme - which is bad for investors - doesn't mean the products are bad for consumers. It's almost like a wealth transfer instead.
Investors support a business that consumers buy into, the investors get wiped out once the company unravels and lose, but the consumers who bought use and continue to use the products get to keep the product - assuming in this concrete case that Peloton doesn't lock everyone out remotely.
This doesn't mean the company is bad, just that it's a bad investment. The product can still be extremely successful and useful.
Does this mean the company failed to deliver value? Depends on who you ask. The consumers who bought the products will say no. Only the investors will say yes.
Companies exist for reasons beyond returns to investors. They should aim to be sustainable, but if they're not, it doesn't necessarily mean they're a "bad" company.