Hey Mark Cuban, Is The Stock Market Still for Suckers?

In my professional day life I’m an investment advisor. By way of disclaimer, this post is not intended as investment advice in any way shape or form. Past performance is not indicative of future success, blah, blah, blah, etc.

“Ive said a lot of this before. The stock market is by definition a ponzi scheme. As long as money keeps on coming in, then there is someone to take the stocks from the sellers. If the amount of money coming in is reduced, the stocks, indexes, et al go down. What if, for who knows whatever reason, the amount of money going into stocks declined significantly ? Who would buy stock from the sellers. I mean goodness gracious, you could see something disastrous happen. Like the Nasdaq dropping from 5000, to under 2000 in just a few years. Its happened before, it can happen again.”

Mark Cuban, January 3, 2006

Two years ago in post titled “The Stock Market is for Suckers,” Mark Cuban responded to comments I’d made suggesting that over long periods of time the stock market was a superior investment to cash equivalents. 100% of my long-term retirement plan assets are invested in buy and hold equities.

More from Cuban: “Wall Street has done an AMAZING job of creating conventional wisdom . “Buy and Hold ” is the 2nd most misleading marketing slogan ever, after the brilliant “rinse and repeat” message on every shampoo bottle. We as a country have fallen for it. Every message from every marketer of stocks tell us. Young or old, if you can hold for the long term, things will work out for you.

That is total bullshit. Its for suckers.”

So in the spirit of agreeing to disagree, two years ago I decided to keep track of how two investors who followed Cuban’s advice or didn’t follow his advice would have faired. Each year I’m going to continue doing a recap of how a hypothetical $100,000 investment would have faired between Cuban’s advised cash investing vs. investing your money in the Vanguard Total Stock Market Index, a low cost no load equity mutual fund.

Mark, if you don’t think the stock market is for suckers anymore let me know.

Last year was my first annual recap. For last year I tracked how a 100,000 investment would have faired in the Vanguard Prime Money Market fund vs. The Vanguard Total Stock Market Index. The results for 2006? 100,000 invested in cash (as Cuban advised) would have grown to $104,882.60. $100,000 invested in the Vanguard Total Stock Market Index would have grown to $113,890.00.

So what happened in 2007?

Well, assuming you continued using the same two funds (i.e. buy and hold). The ending value from January 2, 2006 to December 21, 2007 using the Vanguard Prime Money Market Fund (VMMXX) would have returned $110,280. Not a bad return for your $100,000 in two years… perhaps….

Had you invested the same $100,000 in the Vanguard Total Stock Market Index (VITSX) over the same time period you would have grown your $100,000 into $122,130.

So the question is, if for the last two years you’d dismissed Cuban’s “stock market is for suckers” advice and netted an extra $11,850 on your investment does that still make you a sucker?

Cuban says that by skipping the stock market you’d have slept like a baby. But at what cost? Is it worth $11,850 over the past two years to have slept like a baby. Personally 100% of my retirement assets are in stocks (I’m 39 and have a long time until retirement) and I slept just fine the past two years.

Another part of Cuban’s argument seems to rest on the fact that investing is confusing and Wall Street only makes it more so. But following a simple strategy of buying low cost diversified index funds does not have to be confusing at all.

Will 2008 be the year that vindicates Cuban in his great “stock market is for suckers” post of 2006? Who knows. But let’s come back here in January 2009 and check it out. Between now and then with a historically low P/E ratio on the Standard and Poor’s 500 of 17.53, I’m sticking with my long term buy and hold strategy.

Of course what do I know, Mark Cuban’s a billionaire and I’m not.

Be Sociable, Share!
Loading Facebook Comments ...

No Comments

  1. Tyro says:

    In my semi-professional day life, I’m a stock trader. Not a wildly successful one, but I hope to be one eventually…

    I actually agree with both of you, sort of. Mark is right that the market is fueled by the next-bigger-sucker and if you were to look at individual stocks, you could see the disastrous consequences of this. Take a look at CHNR or even CROX for example. You get a fad and the stock burns bright, and then at some point no one wants to buy and it comes crashing down. As it drops, everyone that’s holding shares tries to sell and the stock drops further. Once the fad is over, there’s no reason to buy so after the initial panic, the price drops further and further.

    If we have enough of these stocks collected together as we had during the dot com boom, the drop doesn’t affect just a single stock but hundreds of them. Because of the way the stocks are structured, the intrinsic value of a single share is often far, far below the current price that stocks can drop 50%, 80%, 90% before they find a bottom at which point, a lot of “Buy and Hold” investors (read “Buy and Hope”) have lost collective fortunes.

    On the other hand, you are right in that a smart stock picker who is willing and able to exit early and then jump onto the next fad can get results which are superior to almost any other investment vehicle, especially when you consider liquidity and leverage. Some people rightly observe that you can make great returns by trading real estate, but if you were willing to take out the same extreme level of debt, stocks will more than outstrip real estate.

    The biggest problem with your defense is the “buy and hold” mentality which has cost investors millions or billions. In reality, you are not buying and holding, you are selecting a stock advisor (via your mutual fund) to trade actively on your behalf. By teaching people to “Buy and Hold”, you’re teaching them to be the last, biggest sucker, to buy at the top and then when the pain is too great to bear, sell at the bottom. If you want to help people, teach them to always, always, always use stops because holding through unnecessary pain (as opposed to normal fluctuations) is what defines a sucker.

    Just my little opinion… 🙂

  2. Tyro says:

    Those charts look even “better” in linear format 🙂

    CHNR

    CROX (the maker of those horrid plastic shoes)

  3. Mike Smith says:

    Thomas,

    It seems like you and Mark are talking about 2 different things. Mark is talking about an individual investor trying to pick from a multitude of stock or fund options, buying and selling them over the long term as they try to follow the wisdom of the analysts and investment advisors such as yourself.

    On the other hand, your “experiment” simply buys a no-load total market fund and holds it. Over a long period (10yrs+), this clearly has been proven by many researchers to be the most effective investment strategy. But thats not what Mark was talking about.

    In your experiment, the person “investing in the stock market” isn’t accumulating all the trading fees, management fees, advisor fees, etc… that are associated with those types of investments.

    I’d suggest adding a third experiment. Why don’t you post your own portfolio of stock or fund choices and what you intend to do each year and keep track of all the net (after fees) gains/losses. OK, you probably don’t want to expose yourself like that but maybe post those choices from another regarded stock/fund picking expert. I think you’ll find that the “cash plan” stacks up well with the “experts plan” and both the cash and both fall well short of the “no-load market fund”.

    Perhaps I can end with a question (and I really do mean this in a respectful manner – I’m not trying to disparage you or your profession). In your opinion, are most investment advisors worth the money that you pay them or would 99.99% of people be much better off just investing in a Vanguard Market fund and leaving it at that?

    PS. Just so you know I’m not trying to ‘flame’ – I’ve enjoyed your site for years and your photos are truly beautiful art.

  4. Anonymous says:

    How’s that buy and hold strategy working-out for you now, Tom? Try not to choke on the foot in your mouth.