Transforming $1 Million into $1 Billion: Mark Cuban's take on Share Market

vocal vignettes

26 Feb 202401:57

Summary

TLDRThe script delves into the nuanced reality of stock ownership, debunking the common perception that holding shares equates to having control over a company. It highlights that true control is reserved for controlling shareholders or those who actively engage in corporate actions. The discussion then shifts to the U.S. capital structure and bankruptcy proceedings, illustrating how shareholders theoretically have claims in a liquidation hierarchy but practically lack control. Additionally, it touches on the shrinking pool of public companies, attributing the stock market's rise partly to this scarcity and corporate buybacks. The narrative concludes with personal insights into cryptocurrency investments, sharing the speaker's experiences with a Swedish Bitcoin ETN and the challenges of direct cryptocurrency purchases.

Takeaways

😊 Owning shares does not necessarily give you control or authority in a company.
🤔 Public companies going bankrupt is relatively rare, contributing to stock market growth.
📉 The number of public companies has dramatically declined from ~9,000 in 1998 to ~3,500 now.
👀 360 of the S&P 500 companies are buying back their own shares, decreasing supply.
🔐 Bitcoin and Ethereum have defined scarcity that increases their value.
🤑 The speaker owns Bitcoin exposure through a Swedish exchange-traded note.
😕 The speaker tried but failed to directly buy Bitcoin previously.
🙃 Bitcoin price volatility made the speaker hesitant to buy directly.
😎 The speaker does not own Ethereum.
🧐 Financial engineering helps some companies like IBM manipulate their stock price.

Q & A

What is the common perception about owning shares of a company?
-The common perception is that owning shares gives you ownership and control in a company, but this is often not the case unless you are a controlling shareholder.
How does the US bankruptcy process relate to stock ownership?
-In the US bankruptcy process, stock owners are paid last after senior lenders, junior lenders etc. So while stock represents ownership on paper, stock owners have little control or claim when a company goes bankrupt.
Why has the stock market continued to go up dramatically?
-Two reasons - easy money policies and the declining number of public companies, which has made existing shares more scarce and valuable.
How many public companies were there in 1998 versus now?
-In 1998 there were around 8,000-9,000 public companies but now there are only around 3,500.
What are share buybacks and what impact do they have?
-Share buybacks are when companies buy their own outstanding shares to reduce the share count. This makes the remaining shares more valuable.
Does the speaker own any cryptocurrency?
-Yes, he owns exposure to Bitcoin via a Swedish exchange-traded note (ETN) because it provides liquidity. He tried buying Bitcoin directly but found it too complicated.
What problems did the speaker face when trying to buy Bitcoin directly?
-He found it was a hassle in terms of time and effort. By the time he got his account open, the price had moved too much for him to justify buying.
Why does the speaker say there is no greater scarcity than Bitcoin and Ethereum?
-Because there is a finite supply of coins available. This scarcity drives the value compared to fiat money which central banks can always print more of.
What is the speaker's view on owning cryptocurrency?
-He seems to have a positive view on cryptocurrencies given his attempts to purchase Bitcoin and commenting on the scarcity value. But he has not directly invested other than the ETN.
What is the overall tone of the discussion around stocks and crypto?
-The tone is fairly positive and bullish. The speakers highlight reasons for the growth in equity markets while also noting the potential value and scarcity of cryptocurrencies.

Outlines

00:00

🤑 Ownership of public companies and stock market dynamics

The paragraph discusses the concept of stock ownership in public companies. It argues that while shareholders technically own a company, they have little control or authority unless they are a controlling shareholder. Public company bankruptcies are rare. Easy money policies and declining number of public companies have driven stock prices up. Top companies like IBM rely on financial engineering to reduce outstanding shares and boost prices.

Mindmap

Keywords

💡Share of Stock

A share of stock represents ownership in a company, but as the script highlights, this ownership does not grant the shareholder any significant control unless they are a controlling shareholder. The discussion suggests that while owning stock theoretically involves a piece of the company, in practice, the power and influence over company decisions is minimal for the average investor. This concept is central to understanding the dynamics of stock market investments and the limitations of stock ownership.

💡Capital Structure

Capital structure refers to the way a corporation finances its assets through a combination of debt, equity, or hybrid securities. The script mentions the capital structure in the context of liquidation, where senior lenders are paid before junior lenders, and shareholders are the last to receive any remaining assets. This concept is crucial for understanding the hierarchy of claims in the event of a company's bankruptcy and illustrates the inherent risk of equity investments.

💡Bankruptcy

Bankruptcy is a legal process through which individuals or companies who cannot repay their debts to creditors may seek relief from some or all of their debts. In the video script, bankruptcy is discussed in relation to the capital structure, highlighting the order in which creditors and shareholders are compensated. This underscores the risks associated with being a shareholder, as they are last in line in the event of a bankruptcy.

💡Corporate Buybacks

Corporate buybacks, or stock buybacks, occur when a company purchases its own shares from the marketplace, reducing the amount of outstanding shares. The script ties this concept to the reduction in the number of public companies and the scarcity of shares, suggesting that buybacks can drive up stock prices by creating scarcity. This practice is part of financial engineering strategies that companies like IBM use to potentially enhance shareholder value.

💡Scarcity

Scarcity, in the context of the video script, refers to the limited availability of public company shares due to factors like corporate buybacks and the decline in the number of public companies. The discussion suggests that this scarcity can drive stock prices higher, as fewer shares are available for purchase. This concept is crucial for understanding market dynamics and the value of investments.

💡Bitcoin and Ethereum

Bitcoin and Ethereum are mentioned as examples of cryptocurrencies, digital or virtual currencies that use cryptography for security. The script discusses them in the context of scarcity, comparing their defined limited supply to the scarcity created by corporate actions in the stock market. This highlights the appeal of cryptocurrencies as investment options due to their inherent scarcity.

💡ETN (Exchange-Traded Note)

An ETN is a type of unsecured debt security that tracks an underlying index of securities and trades on a major exchange like a stock. The script mentions an ETN in Sweden for Bitcoin, used by the speaker for its liquidity and ease of investment compared to directly purchasing cryptocurrencies. This illustrates a way investors can gain exposure to digital assets without dealing with the complexities of buying and storing them.

💡Liquidity

Liquidity refers to the ease with which an asset or security can be converted into cash without affecting its market price. The script touches on liquidity in the context of investing in a Bitcoin ETN for its ease of trade, contrasting it with the challenges of directly purchasing cryptocurrencies. This concept is vital for understanding the practical considerations of investing in different types of assets.

💡Financial Engineering

Financial engineering involves the use of mathematical techniques and strategies to solve financial problems or create financial products. The video script uses IBM as an example, suggesting the company engages in financial engineering through practices like stock buybacks to manage its stock value. This highlights how companies can use financial strategies to influence their market perception and shareholder value.

💡Public Companies

Public companies are those that have issued securities through an initial public offering (IPO) and are traded on at least one stock exchange. The script notes a significant decline in the number of public companies since 1998, linking this to the concept of scarcity and the impact on stock market dynamics. Understanding the landscape of public companies is essential for grasping the broader context of investment opportunities and market trends.

Highlights

Stock represents ownership in a company, but shareholders have little control or authority unless they are majority owners

Public companies going bankrupt is relatively rare, so shareholders can make money as stock prices rise

The number of public companies has dramatically declined, contributing to rising stock prices due to scarcity

Many S&P 500 companies buy back shares to reduce supply and increase prices

Bitcoin and Ethereum have provable scarcity that drives increasing prices

The speaker owns Bitcoin exposure through a Swedish exchange-traded product for liquidity reasons

The speaker tried and failed to directly buy Bitcoin due to the hassle and volatility

The number of public companies has dramatically declined from 8,000 in 1998 to 3,500 now

IBM relies heavily on financial engineering instead of core business operations

It's difficult to directly purchase and own cryptocurrencies like Bitcoin

Public companies have declining shares outstanding, driving increasing prices

Owning cryptocurrency requires a time investment to set up accounts and secure keys

Volatility makes timing cryptocurrency purchases difficult

Scarcity drives increasing prices for assets like stocks and cryptocurrencies

The bankruptcy process prioritizes senior lenders first, then shareholders last