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Home » Invest, Market Terminology, Stocks, Wall Street News

Mark Cuban’s Solutions to Fix the Stock Market

Last updated by on 7 Comments

Kelly, a 20somethingfinance reader, passed along a blog post from Mark Cuban the other day that takes a different approach to basically saying the same thing I said in my post about the May 6 stock market crash – the market is no longer a place where buy and hold amateur investors can thrive and prosper.

“Traders the Equivalent of Hackers”

It’s 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

mark cubanWhat’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.

Cuban’s Solution

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?

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7 Comments »
  • Paul Puckett says:

    Mark makes several excellent points. As an investment advisor, I must agree with his premise that most of Wall Street is not in the business of capitalizing companies. I would also agree that most stocks are not bought by individual investors. Institutions control the movement of the market, primarily through mutual funds, variable annuities, and retirement plans. There is also a much higher percentage of money from large foundations and corporate accounts. Finally, I agree that the majority of Wall Street does not put their client first.

    I disagree with his suggestion of taxing trades. Because institutions are the primary traders, a tax that causes less trading is a manipulation by the government that does not serve any investor. Taxes should not be a consideration when deciding to sell or buy a stock and elimination of the capital gains tax would be a better solution.

    Dividends are one portion of a stock’s return. There is nothing wrong with owning stocks that do not pay dividends. As a matter of fact, owning only one, or the other, guarantees more volatile (up and down) performance. Growth stocks offer only the potential for capital appreciation, but with dividends currently averaging below 2%, capital appreciation makes up the majority of almost any stocks return. Dividends were the majority of return a century ago.

    Finally, although I don’t blame Mark for this at all, anyone with $2.8Billion should delegate the management of their money just as they delegate their landscaping. Monitor and watch the managers, but don’t attempt self-management with that kind of money unless you really enjoy it. I don’t blame him because the industry has many who have no interest, or obligation, in serving their client. With the Madoff scandal, many investors are reluctant to trust anyone. It is important to remember, every dollar in the Madoff Ponzi scheme was in his hedge fund. Hedge funds are exempt from the Investment Advisors Act of 1940 and are not subject to audit by the SEC or FINRA. Actually, they are not subject to audit by anyone outside of their choice of accounting firms. To fully understand the Madoff scandal, I recommend to your readers “No One Would Listen”(Wiley) by Harry Markopolos.

    To fix Wall Street, eliminate exemptions and increase transparency. Make the transparency short and simple, summary style. Most investors have probably not read their mutual fund prospectus and probably also don’t read the annual and semi-annual reports. The length and language of each are daunting for professionals and complicated for the average investor.

    Great post, and even though I disagree with Mark’s proposed solutions, his heart is in the right place and he is involved in the issue. Hopefully, he will inspire more high net worth investors to pressure Wall Street to simplify their products, comply with existing regulations, and put investors where they belong: First!

    Great post

  • Jesse Taylor says:

    Dropping capital gains for long held investments sounds like a decent idea. That would maybe give a little boost to people who aren’t just sloshing money around.

    What always strikes me about the Stock Market these days is how little it actually resembles, well, capitalism. It’s less concerned about optimizing the economy by providing a way for companies to compete for investment resources, and more concerned about the “meta” issues – less about finding value and more about creating a vehicle to bet on the perception of an abstracted asset structure which may once have come in contact with value. There has to be some level of abstraction in the system, but now the system is the abstraction.

  • Michael says:

    I’m new to personal finance, and I won’t claim to be an expert, but isn’t diversification a pillar of investing? Wall Street may have originally been intended to be more one-on-one, but with all of our financial and technological tools at our disposal, when would it ever be a good thing for individuals to buy and hold single, volatile stocks?

  • Joe says:

    It is indeed scary when someone as wealthy and obviously good at making money says Wall Street is too tough a nut for him to crack on his own. I kind of get the feeling lately that Wall Street traders are more junkies for the high of making multi-million (or billion) dollar deals than anything else. I don’t think they’re coming at trading from a place of responsibility.

  • Budgeting in the Fun Stuff says:

    We love dividend paying stocks too, but that isn’t the only thing that keeps us “in the game”. I’d think that anybody with more than 20 years until retirement would think that overall market returns are a reason to invest.

  • Bruce says:

    Dropping capital gains for long held investments sounds like a decent idea. That would maybe give a little boost to people who aren’t just sloshing money around.

    What always strikes me about the Stock Market these days is how little it actually resembles, well, capitalism. It’s less concerned about optimizing the economy by providing a way for companies to compete for investment resources, and more concerned about the “meta” issues – less about finding value and more about creating a vehicle to bet on the perception of an abstracted asset structure which may once have come in contact with value. There has to be some level of abstraction in the system, but now the system is the abstraction.

  • Chris Dunn says:

    I’ve grown to agree with many of Mark Cuban’s points, but I think he’s dead wrong about trader taxes. This would dry up liquidity and put thousands of individual traders out of business.

    I’m not claiming to have all the answers, but I think a trader tax would do more harm than good.

    Just my two cents,

    Chris Dunn

    Emini Academy

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