Cuban on the Stock Market: Right on the Money

by JT McGee

Mark Cuban reposted a very critical blog post of his experiences with investors, bankers, and financial planners and stockbrokers.

His thesis was, basically, nothing really drives the stock market but marketing. And he backs it up with experiences like:

  1. Watching tech companies explode overnight just because they were tech companies.
  2. Meetings with investment bankers where little to nothing was discussed about the business.
  3. Seeing stocks move up and down based on nothing to do with the fundamentals, the company’s future income stream, or the income stream to the investor (dividends.)

He’s spot-on all the way through. Wall Street isn’t as perfect or as rational as we want to believe. It’s not always an efficient means to distribute capital to good ideas. And many companies are never going to listen to shareholders or return earnings to shareholders in the form of significant dividends. (Apple, I’m looking at you!) So it just becomes a marketplace to swap paper certificates from one person to another, hoping someone else will pay just a bit more.

Think Facebook, for example. Zuckerberg has 100% control of the company and you can’t do anything about it. If you invest in FB, your returns will be 100% decided by that one man. That’s scary.

He’s also right that stocks are priced based entirely on supply and demand. Total agreement from me, obviously. Stocks that are in the “hot” industries are always too expensive. Stocks in boring industries are, in my view, much more likely to be undervalued. Also, large caps get more attention and small caps get virtually zero, which also creates some valuation errors.

Check out his post titled “The Stock Market.” It’s pretty entertaining.

{ 12 comments… read them below or add one }

William @ Drop Dead Money January 28, 2013 at 12:25

I read the post and fundamentally I disagree. I understand what he says and how he experienced the market and investment bankers. That part I can’t disagree with. However, to take and to project it into sweeping statements is a reach.

Lets see if I can back this up. For every Facebook and Apple there are three or four dividend aristocrats (google the term to find them) . Look a little closer at one of those companies, Grainger (GWW). Solid, well run company. Look at it’s performance for the past 10 years. Look at BRK for the past 20 years: it went from $8,800 to $146,000. Supply and demand only?

Stocks are NOT entirely (emphasis on entirely) priced on supply and demand. The first and most important component of a stock’s price is its earnings. And funny thing: Good performance generates demand. Poor performance doesn’t. So saying stock prices are purely based on supply and demand is like saying his Mavericks team’s ticket and merchandising sales are only based on supply and demand. Wrong. When they won the NBA championship, they generated a lot of demand. Same with companies who consistently (albeit quietly) perform.

Yes, the market in general goes through swings tied to the general economic cycle, but what investment doesn’t?

I agree that certain fashionable stocks get their prices pushed too high by the herd, and others get pushed too low when they’re on the outs. But to generalize that these few stocks represent the market is factually incorrect. There are something like 14,000 stocks to choose from. Apple and Facebook are not representative.

The facts, when you look at them more completely, therefore don’t support Mark Cuban’s generalizations.

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JT McGee January 28, 2013 at 17:57

I think it’s something like 70% of stocks don’t pay dividends. So, the number of non-dividend payers is pretty high. The number of companies that neither pay dividends or repurchase shares in excess of option issuance is likely just as high.

Now, see, I disagree with the idea that stocks aren’t priced based on supply and demand. There’s no intrinsic value to a stock other than what someone else is willing to pay. The future earnings don’t mean anything unless someone is willing to pay for them. Unless the prospects for future earnings stimulate demand at a higher price then a stock will not trade at a higher price. Hence why marketing is so important to a stock price, why IR departments exist, and pump and dump email scams happen. I’ve found companies that, less current assets, trade for a negative P/E multiple despite being profitable. They lack in marketing and coverage, not earnings, so they sell really cheap.

Fundamentally, I think he’s right about the market. But there are a few generalizations that don’t play true in every case.

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Value Indexer January 28, 2013 at 13:15

While he has some good points, I think he overstates things a bit. You can buy anything from the S&P 500 index to a dividend index to an individual utility stock and get a steady stream of dividends in cash. Even companies that don’t pay a dividend can be bought out. I don’t know how many companies go from IPO to bankruptcy without distributing any cash to investors but I don’t think it’s a plague on the market.

He is right to point out that there are many distortions. Anyone who thinks that the price a stock sells at today is always its best price is in for some surprises (there’s this company that rhymes with “pple”…).

Long term investors can wait to get the right price and make a good return. Those who monitor the market daily are more likely to drive themselves crazy trying to figure out what happened. That sounds like Cuban’s experience.

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JT McGee January 28, 2013 at 18:02

I would be really interested to know how many stocks go from IPO to bankruptcy without paying a dividend. I’ve always, always wondered what that number was, since I like to buy stocks that work more like a slow-growing perpetuity (focus on lasting forever) than faster growth with no idea of where the top is. Think Coca-Cola vs. some drug company, or something.

I think he’s fundamentally right, that the stock market is a crazy place full of crazy people where a single trade by the most angry, happy, or melancholy person sets the price for an entire company. I think stocks can trade above and below a reasonable intrinsic value for a very long time, but I think that value will eventually be discovered if the company lasts long enough.

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Value Indexer January 28, 2013 at 18:15

Sounds like a great research idea 🙂 It could be harder to track new companies, dividends, and bankruptcies if you go off the major exchanges (and many companies can live there as they’re growing or declining).

I understand that the value of the entire company is set by the last person to click the “Trade” button, but that can work for the investor just as much as it can work against them. Now if you’re talking to a bunch of stock marketers who are just trying to sell something at the peak of its popularity you’ll see the downside every day. If you leave them behind and do a little research yourself you can find a lot more upside.

I guess the rant is about financial services, not the market itself.

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JT McGee January 31, 2013 at 13:07

No, no, I definitely think there’s a lot of upside in less marketed companies, and I don’t even bother to invest in the hyped stocks. But I also recognize that a stock isn’t going to rise in value without a little marketing love from the financial services community, either retail (selling stock to individuals) or institutional (activism, research reports, buyouts..my favorite!)

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Value Indexer February 3, 2013 at 11:35

I’d love to buy a stock that pays a nice dividend and never rises in value while I keep reinvesting. Or in your case, a stock that never rises in value while you keep buying more right up to the day a larger company eats it up at a nice premium. Rising prices are a curse for long-term investors.

Brett @ wstreetstocks January 28, 2013 at 20:56

Mark Cuban definitely nailed it. You can really see how a stock’s price is just marketing. Facebook was heavily touted in roadshows and on tv last year. The stock failed to pop on day 1 so the media turned on the company and the stock has suffered ever since.

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Brick By Brick Investing | Marvin January 30, 2013 at 10:52

I believe Mark Cuban isn’t your average investor. The man is an entrepreneur and quite frankly doesn’t understand TRUE investing. The reason why a lot of tech companies blow up overnight is because they are in a tough industry and generally leverage themselves too much or become obsolete. Look at Research in Motion & Nokia.

Secondly, a great stock doesn’t need to market. I don’t know about you but until I became financially literate I had never heard of Altria (MO), a stable dividend payer for years on end.

Finally, I love that stocks go up and down in price ESPECIALLY when it has nothing to do with financials. If only I had been as knowledgeable as I am now back in 2008 I would be worth a fortune today. Every single stock tanked because mainstream investors were fearful that the world as we knew was coming to an end. Companies like McDonalds and Coca Cola were going on fire sales compared to their true value. This is the time when you want to buy stocks, you will eventually get your money back once the market realizes their mistake. While you are waiting you will receive a healthy dividend.

As I said before Mark Cuban is absolutely brilliant and probably hates stocks because he has absolutely no control in the company which he is use to having. Stock investing is more of a passive role in business while Cuban loves hands on.

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JT McGee January 31, 2013 at 13:11

“Secondly, a great stock doesn’t need to market. I don’t know about you but until I became financially literate I had never heard of Altria (MO), a stable dividend payer for years on end.”

Notice, though, that it was only until you became financially literate that you heard of the best performing stock in American stock market history. I didn’t need to be a baseball fan to hear of Babe Ruth or Hank Aaron or Ty Cobb. There are something like 8000 stocks out there…we hear about maybe 500 of them on any given day.

You make a good point about Cuban wanting a hands on approach. It would make sense why he’d like the private markets where he can have control over capital flowing through a business, and valuing businesses how he sees fit.

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Wayne @ Young Family Finance January 30, 2013 at 21:41

It’s nice to see an amusing article about stocks once in a while. Those don’t come by very often. They should, too, because much of it is a joke!

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Chris@The Credit Cat January 31, 2013 at 12:27

Certainly want a company with a well established CEO and board of directors in it. Having Zuckerberg in control of everything is quite scary!

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