The Ponzi Factor: The Simple Truth About Investment Profits

by Tan Liu

"All truth passes through three stages. First, it is ridiculed. Second, it is violently opposed. Third, it is accepted as self-evident." --Arthur Schopenhauer

The Ponzi Factor is the most comprehensive research ever compiled on the negative-sum nature of capital gains (non-dividend stocks). The book shows why, as a whole, ALL investors will lose money from buying and selling stocks.

Most people don’t realize that profits from buying and selling stocks come from other investors who are also buying and selling stocks. When one investor buys low and sells high, another investor is also buying high and needs to sell for even higher. Companies like Google, Telsa, Facebook never pay their investors. Their investors’ profits are dependent on the inflow of money from new investors, which by definition, is how a Ponzi scheme works.

This book is not for everyone. If you are a finance junkie who wants to rationalize why companies don’t have to pay their investors and believe a system that shuffles money between investor can magically create more money than people contribute, then this book is not for you. On the other hand, if you understand why we can’t create money by shuffling it with imaginary paper, and that investors invest because they want money, not value, then you will learn something you will never forget: The mechanics of how the stock market works and what really makes a stock price move.

A stock without dividends is a Ponzi asset. It’s not how equity instruments were designed to work historically and not how ownership instruments are supposed to work logically. The Ponzi Factor is not a perspective or an opinion. It is a proof that is based on definition, logic, and it is supported by observable facts and history. This is not a story that will disappear after another market crash. It is an idea that will remain relevant for as long as the stock market exists.

Lastly, to critics, the naysayer, and the finance junkies who think the imaginary value = cash. The author will award $20,000 to anyone who can show why non-dividend stocks DO NOT meet the definition of a Ponzi scheme. That’s $20,000 in cash, not value. (Details on this book's website. The Ponzi Factor. Proof by Definition.)

Genres: Economics, Business, Finance, Politics, Nonfiction

187 pages, Kindle Edition

First published February 10, 2018

Reviews

[Pedro L. Fragoso · Rating 5 out of 5]

Very clarifying, highly educational, commendable and definitely recommended.

Excerpts (between « », the rest are my considerations).

« Universal Error: The error of treating the assumed monetary value of an asset as a cash equivalent.

The Securities and Exchange Commission defines a Ponzi scheme as: “An investment fraud that involves the payment of purported returns to existing investors from funds contributed by new investors.” Remove the opinion word “fraud” from the definition, and what do you have? The stock market.

“All truth passes through three stages. First, it is ridiculed. Second, it is violently opposed. Third, it is accepted as self-evident.” -- Arthur Schopenhauer. Real profits come from end-users. Ponzi profits come from other investors. The truth really is just that simple.

Stocks came into existence because of dividends, and stocks without dividends are nothing more than Ponzi assets. The common stocks that dominate the stock market today are not equity instruments—they are a mutated form of what legitimate equity instruments once were.

My best guess is that the regulators are either in denial, confused, or just plain stupid—and I use the word “stupid” with great care and caution. »

This is an amazing reading of utmost importance, that even manages to achieve some literary elegance (as for instance in the conclusion that "On the other hand, it is clear that no one can pull $30 trillion out of their ass to bail out the current investors, and this bomb is only going to get bigger over time.")

Thanks, Tan. And also, thank you Lee Camp (of the comedy show where "Americans in America covering American news for Americans are called foreign agents") for the great interview that introduced me to the author and this FANTASTIC book.

[Barbara Calder · Rating 5 out of 5]

A well written, interesting read. I had planned on downloading the book this weekend since I noticed it was FREE, but when I mentioned it to a friend, they offered me a printed version they had been given! I feel like I won the lottery. I love printed editions and I enjoyed the book a great deal.

There were several times when the author repeated the information. I did not find it objectionable since a great deal of the ideas that were duplicated , I felt, were because the information was inconceivable at best and malevolent at worst. Mr. Liu uses words and terms the average person understands and I greatly appreciated that. Far to often those on Wall Street and the people who report on finance ,purposely use terms and phrases many lay people do not understand. This is a book for the masses, as it has important, yet virtually unheard of information.

I could have finished the book in a day if I had not taken the time to research many of the claims noted in the book. When I read or hear an idea antithetical to one I have grown up , I do not toss my old ideas into the dust bin without a fight. That being said, I am now looking at options for my retirement account. My investments, albeit small at the moment, are at least worth something!

Decades ago I realized , thanks to Dr. Ron Paul, that the Federal Reserve System was one of the primary reasons for inflation in the USA. Dr. Paul changed the way I looked at the US monetary system. Now, thanks to Mr. Liu, I will never view the stock market in the same manner as I did just a few days ago. This book is a must read .

[J Cook · Rating 5 out of 5]

This is a great book, where the basic premises are presented in a very direct and logical fashion. The whole idea is a great big "Duh. That is obvious." However, the obviousness of it all shows why MOST people miss it – the flaw is too big, almost the whole picture, not just a small easily fixed part. It is simple (not simplistic) and people, especially the financial “experts” who have been shown to be in error tens of thousands of times, cannot handle simple. They are addicted to complexity as it helps them hide behind the, “it is too complex for you to understand” idea.

The very FOUNDATION, actually the ground beneath the foundation, of our stock and trading system is essentially a false premise and the flaw is SO BIG that it is very hard to admit especially when we base SOOOOO much on it. We have to admit that we live in a myth that we all are a part of.

Highly recommend that everyone listen to the intro on YouTube. Not only is it well written, but the narration is truly excellent.

[Rabin Rai · Rating 5 out of 5]

The controversial idea that the stock market is like a Ponzi scheme is a great way to hook readers. The writer does his best to convince the reader as to why the stock market is like a Ponzi scheme by giving lots of solid examples. It warns the reader that stock market has not been proven by economists and university professors that it is a positive sum investment and is no different from gambling rather than investment.

The reader learns the history of stocks, its origins and how the stock market evolved to speculation with no dividends or ownership of actual shares in the company. The writer proposes giving another unit for stock market value instead of dollars $ to tell the difference between a stock and cash.

The chapter on accrual accounting (mark to market) was very interesting and was used by companies to report illusionary profits to stakeholders. Enron also used this accounting fraud to fool investors.

Overall, I loved the book.

[Drew Weatherton · Rating 4 out of 5]

The author validates a perspective I've held ever since learning about stocks in grade school. I figured as I learned more about them I'd come to understand how they reasonably possess value. I've now taken graduate level business courses, worked in the corporate finance team of a Fortune 500 company and owned a number of different investment instruments.

Stocks have almost no inherent value and the value they do have comes from people buying them from you. The earnings you obtain come from new investors, not from the success of the business the stock aligns to. This is likely not a sustainable practice and it's certainly not in the spirit of the original intent of stocks.

I still own a lot of index funds, but basically only because everyone believes them to be a legitimate store of value with some tie to the actual companies' performance. The stock market is an emotional representation of peoples' sentiments, hopes and dreams. It's broken but I doubt it will ever be fixed. For now, I'll play the game with awareness of what it really is and hope the world doesn't wake up before I've made my money. I don't necessarily feel good about my strategy but it's hard to say "no" to the growth I anticipate on my investments.

[Rahul · Rating 5 out of 5]

4.5 🌟

Being a student of commerce and business I do understand finance and investment little better than the layman. I myself at times that many things in finance, investment and accounting are either completely out of logic or so complexly stated which are specious in nature.

The author has described how investment in stock market is one big Ponzi scheme which is advertised to common people as legitimate. Surely things are so complexly stated in the field of finance which big bankers , financers and any other powerful person in field of investment wrongfully use to steal big money from the pockets of common people.
Rather than focusing and doing greater good it is only meant to enrich few and which lead to inflation and economic collapse.

The sector of finance and investment surely needs honest reforms.

[James · Rating 5 out of 5]

I like a book that explain things in simple terms

If you want to understand what the stock market is all about, then this is the book for you. The author did a great job at explaining what's really going on in today's market.

[Rejeev Divakaran · Rating 5 out of 5]

Very illuminating book on working of Stock Market.

[Rose Tucci · Rating 5 out of 5]

My Review of a Great Book - The House of Cards called the Stock Market has always seemed to be an illusion to me. In his book, The Ponzi Factor, Tan Liu has explained clearly how the stock market is a scam at the foundational level. Like most magic tricks, the illusion is what really matters. Tan elucidates clearly how the stock market is a grand delusion; a fantasy that has deceived ourselves and the whole world. Wake up to the truth and begin to democratize the enterprise.

[Giles Cox · Rating 5 out of 5]

It's amazing that we, as a society, believe that this egregious Ponzi scheme known as the Stock Market is central to the health of our overall economy. Nearly all of the gains in the US economy, since 2007, have gone to the financial services sector or FIRE sector (finance, insurance and real estate), an area of the economy that produces absolutely nothing ... except debt.

[DANIEL OSARO · Rating 5 out of 5]

Esoteric Truth

Excellent work.
Erudite.
Helpful and create room for thought provocation.
Nice to explore the unclear areas of the market.
What strategies are available to handle the Ponzi factor besides avoiding the market.

[Alex Lee · Rating 5 out of 5]

Liu presents a very straightforward and concise definition here. As the value of stocks in the market is due to the price future investors are willing to pay for them, this makes stocks part of a ponzi scheme since the actual value of the company as a profit making vehicle is divorced from lower classes of stock.

He does a pretty good job of this, although there is of course, one difference. In a true ponzi scheme the return is promised to investors based on a lie -- that the value of the stock is an "investment" of some fixed return. Nonetheless the difference is pretty small. Stocks today do act as a method of guaranteeing the middle and upper middle classes a retirement vehicle, even if it is a pool exploited by financial advisors and stock companies to raise value at no cost to them.

All in all Liu presents a compelling case. Those that work for a living and are promised a retirement based off interest have their labor exploited by the financial service market and large corporations looking to raise "free money". That "investment" is guaranteed by nothing more than future investors/workers looking to sink more money into the system. Basically that pool is exploited by everyone except those who look to retire. That pool is then controlled by financial service companies to extort even more money from common people.

What is not spoken of by Liu is that this financial system is essentially a voluntary wage-slavery where those who are promised a retirement is exploited at every turn when all they want to do is live their lives. Their wages are taxed, and have charges deducted at every turn while everyone else (financial services industry and corporations) treat it as "free money" that they can dip their sticky fingers into to get a piece through legalized dipping.

Such insight is very rare. Such morality is also rare. Liu consistently looks through the justifications of those surrounding him in recognition of the real wages and values of people who are otherwise blind to what others are doing with their funds.

This has been a really interesting book. I wonder what Liu is doing nowadays with his insight.

[X · Rating 5 out of 5]

Great book, you can go through it in a few hours and it will save you a lot of time when trying to make sense out of the world of stocks.

If you've ever felt that there must be something you're not getting about the current state of the stock market, this book will show you how there is indeed something very wrong with it and how it went in its origins from a legitimate way to invest in a business to being a zero sum Ponzi scheme for non-dividend stocks (more than 50% of the existing stocks nowadays).

For stocks with dividends, he explains how they end up in practice functioning in a similar way, but the dividend payout (which can be manipulated easily) is what makes them fall out of the literal definition of a Ponzi scheme like the other type.

Went through the negative reviews in here and they don't offer any legitimate refutation of the premises that the book makes, but it makes sense that if someone is in that business, making people believe that it is a legitimate investment that creates value and is tied to the companies is what keeps having new stooges coming in to keep the cycles in motion. If they stop coming, the Ponzi system crashes. (Or the federal reserve keeps printing and pumping money to it to prevent it, we can all wonder how long that can work out)

By the way, you'll be cracking up with the story about Orlando the stock cat.

[Sergiu · Rating 1 out of 5]

It’s difficult to tell if the author does not understand the markets or is simply trying to sell a book with a controversial topic.
There are indeed some financial engineering techniques that are questionable, but to argue that ALL investments are a negative-sum game is simply ignorant.
Spare yourself from 4 hour of reading cheap conspiracy and go for some Dalio, Buffet or finance textbook.

[Charles · Rating 5 out of 5]

A rare way to look at the stock market, peeling back the usual BS to reveal its true nature - a MASSIVE global ponzi scheme by which we assign as the backbone of our society. No wonder it feels like the current paradigm is crumbling - it was built on a foundation of sand. enlightening!

[Chris Esposo · Rating 4 out of 5]

Pretty good as the first outing from an amateur author. The thesis of the text is that most class C (common stock) is a Ponzi asset, and thus, accounting or reckoning of wealth (current or future) generated from these assets are illusory, or illegitimate.

The author is a former quant who worked in some boutique hedge funds in NoVA and LA, specifically he worked in a specialist shop to bought and sold assets derived from large policy life insurance, whereby their pricing of these assets was based on underlying actuarial life models that scored the likelihood of mortality. Ultimately this scheme was shown to be untenable and the shop folded,.but not before the author came to certain realizations on the dubious nature of financial "innovation".

The material on the author's background and personal experiences in finance are genuinely interesting, where the book gets redundant with other more famous authors work is when he discusses the monkey business of how shares are manipulated in IPO or through activities like splits, for the benefits of the institutions. Though these sections are still written well.

The only real point of contention is the author's conclusion to not invest in common stock. This is unrealistic for most people as no other vehicle available to the common individual offers so much future growth, illusory or not. Further, a large percentage of people continue to realize wealth derived from these assets via their 401ks and other securities derived wealth vehicles and will continue to do so, so long as people continue to perpetuate and build viable enterprises to invest in.

Still, it's an interesting question to think about l, surely the markets do have strong elements of being "Ponzi-like" if not fully Ponzi, the real question is where do we demarcate one from the other with respect to potential utility that can be derived for the common individual, and the risk of that individual participating in the activity. I don't have the answer to that. Good book for the price.

[Reks · Rating 5 out of 5]

This book is a gospel. And it is being persecuted as such, with more on the way, I predict. I'm a long-time investor, and this author's dissecting of the stock market helped me connect the dots on concepts I've been wrestling with: why equities do not reflect true company value; why a company can go bankrupt with no recourse available to the typical citizen-investor, and why Bernie Sanders said, "The business model of Wall Street is fraud."

In other words, our discovery that the stock market is a Ponzi scheme, meaning that we are not really invested in those companies and that we can only get out if someone else buys our stock (hopefully for more that we bought it from another person)….well this is an inconvenient truth to many. Go ask them.

But it is truth. And truth is powerful, and dangerous. But the truth will reveal itself. It's also true that we might make money in the market, which is why the author is simply saying reveal it as gambling, but not as an ownership asset. Repeat: when we buy an equity in the existing stock markets we do Not Own a piece of that company. They will profit and we have no recourse. Google made billions in the last decade and its stock was flat. That's because other gamblers weren't willing to bid the price up. Even the rare dividend is part of the scheme; the book explains how.

Want to actually own a piece of a company? Walk down the street and find a growing local enterprise that you like and see whether they need help expanding. Bring a lawyer too, because true ownership and distributions require a lot of paperwork.

Ponzi Factor is nicely anecdotal and colorful and the writing flows well. Replete with history of stocks and with accounts from his own finance experience, the author spells out technical terms and politely shows all sides of the debate and then will suddenly let us know a certain concept "is total BS."

Check your hearts before you read.

[Tiago Dias · Rating 1 out of 5]

Entertaining book at best with very flawed reasoning from the Author. He starts from his bad experience at a Hedge Fund that was actually operating a (legal) Ponzi scheme using Life Insurance product but then makes a flawed generalization to the entire stock market.
Key messages from the book:
-Stock market is a zero sum game, not a positive sum as most people think
-Stock market is a Ponzi scheme as most of the gains are coming from Capital Gains and not from dividends - while it might be true for some companies it is definitely not true for all. Several of them have very high earnings could start distributing dividends at any time
-He thinks that Stocks are worth its Dividends + Par value of stock - mentions several times Google as an example but fails to understand the positive effect of not distributing the earnings and compounding interest phenomenon by (1) avoiding dividend taxation (2) Allowing the company to reinvest the money at a high ROIC
-He doesn't understand the concept of velocity of money
"No amount of data can prove you right. One experiment can prove you wrong" - if you think of a specific case where you buy 100% of a company you can at anytime change its policies and start distributing dividends. This is true even if you don't acquire 100% of the company as it has this intrinsic value for any potential bidder, which proves how wrong most of his arguments are.
Most overrated book I've seen on Goodreads.

[John Eldreth · Rating 1 out of 5]

The Ponzi Factor… Not So Much

The book passionately portrays purchasing and owning stock in most public companies as a massive Ponzi scheme. The central tenant is that most company stock has no intrinsic value evidenced by many public companies not paying dividends and many stocks having no voting rights. The idea is the only way to "cash out" these stocks is if there are other investors willing to pay what is being asked for the stock regardless of company performance. And if there are no new investors to buy the stock, the stock owner is left holding nothing of value; hence a Ponzi scheme. The author contrasts this with owning tangible assets like a house or car. The problems I see with this characterization are:

1. A house or car owner is in a similar situation if he can't cash out the house or car because there is no buyer. Witness the many home foreclosures from the 2008 financial crisis. The owners were left with no house and lost all their investment.

2. Actually company stock has value if another company or person wants to buy the company. Witness the sale of Twitter to Elon Musk. Most, if not all, stock owners made a profit from their sale of Twitter stock. The asking price for the company sale is based on company performance. A Ponzi scheme, unlike company stock, has nothing to sell to another company or individual.

[Albert Oh! · Rating 4 out of 5]

En un estilo casi didáctico-pedagógico, muy claro y directo , su autor expone su apreciación -entre otros temas- de que los mercados de valores -y más concretamente el norteamericano- ya no son lo que fueron originalmente.
(y en especial, la cotización de ciertas acciones de empresas tecnológicas que no reparten nunca dividendos o lo hacen muy ocasionalmente y en porcentajes casi insignificantes)

Aunque resulte sorprendente, muchas personas invierten en acciones cuyo valor real (nominal) es cientos de veces menor al valor de cotización (su "precio") y cuyas compañías aseguran que jamás repartirán dividendos.
Esto, en la práctica significa que la única forma de obtener un beneficio es esperar a vender a un precio superior al precio de compra; para lo cual es imprescindible que se mantenga la demanda de "particicpaciones"; es decir, se trataría técnicamente de un esquema Ponzi, o si se prefiere, algo muy-muy similar a un negocio piramidal
Sorprende que tan poca gente sea capaz de verlo tal cual es, pero este librito podría ayudar abrir los ojos al respecto de esta alucinante "confusión" (de trillones de dólares).

[Boni Aditya · Rating 5 out of 5]

I am impressed with this book.

The author had the guts to go against the system and reveal its flaws.

I had a similar awakening, during my internship at mirae asset mutual funds - when i left a career in finance, and became a product manager.

The wall street is just a ponzi scheme, without the main street the wall street does not exist.

I love the way the author could put one and one together. I never invested in stock markets to this day after getting an MBA in finance. i am really happy that my MBA drove in the right direction.

It helped me judge right from wrong.
What ever the author wishes to tell he does so in the first few lines, or first few pages of the book.
The rest of the book offers evidence for the claims that the author makes in the first few pages.

The author does not just show the problem, the author also shows solutions to this problem.

Which is what i like about this book

[Тодор Тодоров · Rating 4 out of 5]

The author employs Karl Popper's idea throughout the book in order to show the fallibility of the stock market. He also references a lot to Taleb's books. His ideas seem reasonable, as he says "all ideas seem reasonable to some extent". Tan sticks to the idea that firms that do not pay dividends on their stocks, participate in the stock market as Ponzi scheme contestants. The author argues also that the capital gains on stocks is an idea that has to be abolished and has no value, as the capital gains are generally due to future investors that value the relevant stock more than the present holder of the same stock. Generally, good ideas presented in a short and concise book, which could have been even shorter.

[Carlos Giadáns · Rating 5 out of 5]

Me parece que es un libro que vale muchísimo la pena leer. Bastante conciso y rápido de terminar. Me parece que es un libro que debe tratarse con mucho cuidado para no caer en un sesgo de confirmación (o negación). Es una idea bastante controversial, el decir que una gran parte, sí no es que todo el sistema del mercado de valores, es una estafa. Esto apegándose a las definiciones que las mismas instituciones de seguridad financiera dan al esquema Ponzi. Y por el mismo peso de la idea se debe procurar no caer en absolutos y seguirse informando. Por mi parte me ha cambiado por completo la forma que veo el mercado de valores, y me hace entender un poquito más como funciona el mundo.

[Janetymj · Rating 4 out of 5]

Of course, trying to make a point, the author appeared to me as a little bit one-sided. However, this ponzi-like nature of stock market has been on my mind for a long time. I really respect the author for speaking out loud about this because a lot of the people seem so reluctant to think about it this way.

[Hektor Hallenberg · Rating 4 out of 5]

Super easy to read book that changed my already pretty bad view on stocks for the worse. Felt like it could've been written from a more marxist point of view but maybe the book would have lost its great focus on just stocks. Very well explanation of how stocks are for the most part a huge ponzi scheme and a scam.

[Able Lawrence · Rating 1 out of 5]

While there is a grain of truth in the thesis, it’s true of any market, whether Gold or money. The author appears have unidimensional view of the world & naturally everything looks like a nail to the hammer.

[Luís Garcia · Rating 5 out of 5]

I used to believe that the realm of finances and speculation (Wall street realm) was as dangerous and harming to human kind as gambling.
After having read this book, I realize I was wrong.
It is not as bad, it is definitely worse. Far worse!

(Read in Bang Nam Chuet, Thailand)

[Jazzy · Rating 5 out of 5]

Question: What do you have if you cannot sell a car for money?

Answer: A car.

Question: What do you have if you cannot sell a house for money?

Answer: A house

Question: What do you have if you cannot sell your stock for money?

Answer: Nothing

[Esteban Duenas · Rating 5 out of 5]

Do not read this book if you are a day trader or plan on retiring via a 401(k). Author provides excellent insights into how the stock market actually works cogently illustrating how buyers and sellers make money in stocks .

Spoiler alert, the title of the book lays out the final conclusion.

[Mark · Rating 3 out of 5]

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