Like many small investors, I have recently started thinking of the stock market as nothing more than a Ponzi scheme in which companies and financial services companies conspire to print lottery tickets. Many of us have mostly sat on the sidelines while the DOW went from 7,000 to 11,000, while financial services companies who received a trillion dollars from the bailout have been investing their way to recovery. My hypothesis is that a trillion dollars can buy a lot of pumping up of the stock markets, but there is nothing to sustain it.
In reality, unless a company pays dividends to stockholders, the owner of a share of stock holds essentially nothing. It’s universally true that an asset is only worth what someone else is willing to pay for it. Some assets possess some intrinsic value (e.g., glittery stuff like diamonds or stuff that keeps you warm like oil or real estate that you can live on). By contrast, stock has no intrinsic value whatsoever. It’s like any other currency, and the people who create the currency have the power to devalue it at their own discretion.
All of my life I have heard the mantra that long term investments in the stock market will outperform other types of more conservative investments, but like many individual investors, I have recently come to regard such claims as untrustworthy and self-serving. By staying on the sidelines for the next ten years I may forego gains that flow to others who participate in the game, but I think I’m pretty much done with gambling. I have now seen two major collapses of stock markets in the last ten years, and I don’t care to participate in any more.