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:
- Watching tech companies explode overnight just because they were tech companies.
- Meetings with investment bankers where little to nothing was discussed about the business.
- 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.