Mark Cuban’s Solutions to Fix the Stock Market
“Traders the Equivalent of Hackers”
Mark Cuban recently posted an interesting blog post titled “What Business is Wall Street in?“, and I’d recommend giving it a read. It’s a bit of a longer post, so I’ll highlight some of Mr. Cuban’s finer points. First, Cuban likens Wall Street traders to hackers – justifying their existence through questionable benefits to their industry. He then questions the present state of investing versus it’s original purpose:
“Wall Street is no longer what it was designed to be. Wall Street was designed to be a market to which companies provide securities (stocks/bonds), from which they received capital that would help them start/grow/sell businesses. Investors made their money by recognizing value where others did not, or by simply committing to a company and growing with it as a shareholder, receiving dividends or appreciation in their holdings. What percentage of the market is driven by investors these days?“
A Scary Testimony
What’s somewhat rewarding, as an amateur investor – and horrifying at the same time, is Cuban’s admittance that he feels like there is too much stacked against him as an investor these days:
Over just the past 3 years, the market has changed. It is getting increasingly difficult to just invest in companies you believe in. Discussion in the market place is not about the performance of specific companies and their returns. Discussion is about macro issues that impact all stocks. And those macro issues impact automated trading decisions, which impact any and every stock that is part of any and every index or ETF. Combine that with the leverage of derivatives tracking companies, indexes and other packages or the leveraged ETFs, and individual stocks become pawns in a much bigger game than I feel increasingly less comfortable playing. It is a game fraught with ever increasing risk.
What’s scary about this statement is that it’s coming from Mark Cuban. The man is worth $2.8 billion. If a savvy businessman with that kind of capital can’t find his way around the stock market and get proper guidance in how to profit from it – and feels like the little guy getting screwed by Wall Street insiders…. well, you can see where I’m going with this.
Dividends Keeping Him in the Game
Cuban then highlights his investing strategy at the moment – and it’s a good one that I believe in:
The only thing that keeps me in the market is that most of the stocks (not all) pay dividends or some other sort of cash payout.
According to Steven Johnson, director of simcivic.org, “Capital growth in the S&P 500 averaged 2.3% a year from the mid-1920’s to the mid-1990’s. Dividend yields average 4.6% a year, for a combined gain of 7% a year.” That means that 2/3rds of all returns in the S&P 500 over 70 years was from dividends. That is very compelling. And it’s a strategy that I’m starting to believe more and more in over the years.
My favorite part of Cuban’s post is that he highlights some solutions for this problem that make sense:
My 2 cents is that it is important for this country to push Wall Street back to the business of creating capital for business. Whether its through a use of taxes on trades, or changing the capital gains tax structure so that there is no capital gains tax on any shares of stock (private or public company) held for 5 years or more, and no tax on dividends paid to shareholders who have held stock in the company for more than 5 years. However we need to do it, we need to get the smart money on Wall Street back to thinking about ways to use their capital to help start and grow companies. That is what will create jobs. That is where we will find the next big thing that will accelerate the world economy. It won’t come from traders trying to hack the financial system for a few pennies per trade.
Bravo, sir. Now if we can only get you a job as the head of the SEC.
Mark Cuban Discussion:
- What do you think about Cuban’s points?
- Are you bothered by the fact that a person with Cuban’s wealth can’t find his own way around the market?
- What would you do to fix Wall Street in order for it to be a welcoming place for the little guy again?