Mark Cuban: stock market is probably the worst investment

[GeorgeF]

Mark Cuban is on of the few people suggesting that young people avoid the stock market. It is easy for him to say having made his fortune but he does have a point.

YM: Do you have any general saving and investing advice for young people?
CUBAN: Put it in the bank. The idiots that tell you to put your money in the market because eventually it will go up need to tell you that because they are trying to sell you something. The stock market is probably the worst investment vehicle out there. If you won’t put your money in the bank, NEVER put your money in something where you don’t have an information advantage. Why invest your money in something because a broker told you to? If the broker had a clue, he/she wouldn’t be a broker, they would be on a beach somewhere.
http://www.blogmaverick.com/entry/5966419196452620

[Nemesis]

Makes sense to me. I'm not a huge fan of the stock market as far as a primary investment tool, but for "play" or extra money if you enjoy it then it's great.

[plj8624]

Cuban sounds like a rich idiot who got lucky dumping his dot-com for billions before the bubble burst.
Put your money in a bank? And accept a negative real return? Is he kidding? I agree that brokers are worthless but do some due diligence! Sheesh.

[Non_Comformist]

As far as the market as a whole is concerned, history could not prove him more wrong.

[Ray Zee]

in a way he is right. if you dont know something about the market that the rest of the world doesnt know or about a stock. you should find better places to invest the majority of your money.

[J_V]

How could who world miss this obvious point? It frustrates me.

They should reads Sklansky's rules for making a bet. Information asymmetry is at the top of the list.

[J_V]

Cuban is no idiot, he has his [censored] figured out.

[Mark Heide]

GeorgeF

I agree with what Mark Cuban states about running a business, but the stock market is a great investment for young adults if they do a little research first. It's actually a better investment for someone that is young as compared to someone that is old. A younger person can tolerate the fluctuations in a marker due to the fact that this person will have time for the market to recover from downside fluctuations. Most mistakes in the stock market are made by people thinking they can get rich overnight. A few will get lucky, but most are really gambling and not investing. My advice for someone starting out is to buy into a S&P 500 index fund and hold. This takes no skill at all.

Good Luck

Mark

[adios]

The advice about stocks being a better investment than bonds stems from a couple of things. First of all, over the long haul (which isn't that long /images/graemlins/smile.gif) stocks have outperformed bonds by quite a wide margin. One fact that should be noted is that the measurements assume a reinvestment of dividends. I'll leave it to you folks to decide whether or not stuff like a company buying back stock is preferrable to receiving dividends. When people state that stocks have outperformed bonds they mean that the valuation of the stock market as a whole has outperformed bonds in the long run. The relative outperformance of stocks over bonds is called the equity risk premium. To make a long story short, the magnitude of the equity risk premium as measured by past performance of stocks and bonds does not appear to be justified given the performance of the stock market for long holding periods (20 + years) i.e. that the stock market over long (20+ years) holding periods is not volatile enough in value to warrant such a risk premium. Remember we're talking about long holding periods. There is much debate in financial circles and academia as to why this has been the case and whether or not it will continue in the future. I guess we'll have to wait about 50 years to find out /images/graemlins/smile.gif.

A couple things appear to be obvious to me. If you really want to capture the equity risk premium i.e. achieve the relative better performance of stocks over bonds, one has to buy the market by buying SPY or the appropriate Vanguard funds or whatever and be willing to hold it for a very long time. Also one has to do so on a certain amount of faith, perhaps a lot of faith. When the market hit the skids in the last recession, I believe that over a previous 20 year period bonds had outperformed stocks. I'm fairly certain that where the market stands now going back 20 years stocks have not outperformed bonds by a significant amount. Of course the last 20-25 years has been the era of disinflation and the next 20-25 years may be quite a bit different from a monetary viewpoint. A long winded answer in stating that Mark Cuban may very well be correct. The jury will be out for quite some though.

[Profit]

how can getting a guaranteed negative real rate of return be correct? I'm not looking at any literature, going off the top of my head, but i dont believe there is a period in the US where bonds have outperfromed stocks in any 20 year period. However, many experts seem to believe that this premium between stocks and bonds is going to be diminished over the next 20 years. Regardless, how any1 could seriously take this advice that investing in the bank is the proper thing to do is beyond me.

I'm 22 years old, planning on investing for another 45 years or so. Over the next 45 years, i am 100% convinced that i will outperform any1 investing dollar for dollar in their bank than if i would invest in the S&P.

[GeorgeF]

First if you are 22 the best investment is yourself. At 22 your most important investment is in your future salary and spouse. Get those two right and it does not matter where the S&P ends up (and I am not being sentimental, I mean money wise).

As to stocks vs bonds, which ends up best has alot to do with where they begin. In the past betting on stocks when they yeild little or nothing has not been a good strategy.

[adios]

[ QUOTE ]
how can getting a guaranteed negative real rate of return be correct?

[/ QUOTE ]

Don't follow this one i.e. are you stating that bonds offer a negative real rate of return?

[ QUOTE ]
I'm not looking at any literature, going off the top of my head, but i dont believe there is a period in the US where bonds have outperfromed stocks in any 20 year period.

[/ QUOTE ]

I'm fairly certain that from 1929-1949 bonds outperformed stocks but I'll check it out to make sure.

[ QUOTE ]
However, many experts seem to believe that this premium between stocks and bonds is going to be diminished over the next 20 years.

[/ QUOTE ]

Most data comparing stocks and bond returns start from 1926. It's a relatively short period of time and not a lot of data to crunch in reality. The Capital Asset Pricing Model shows that the equity risk premium is not justified when historical data indicates a 5.5% premium over bonds. I think this is the basis for such beliefs.

[ QUOTE ]
Regardless, how any1 could seriously take this advice that investing in the bank is the proper thing to do is beyond me.

[/ QUOTE ]

I took the article to mean that stocks won't pay the risk premium that people expect. Also my take on what Cuban said was that buying individual stocks is probably not the wisest move for most investors. Savings accounts are probably close to break even on a real rate of return so maybe that's what you're referring to in the first statement I quoted.

[ QUOTE ]
I'm 22 years old, planning on investing for another 45 years or so. Over the next 45 years, i am 100% convinced that i will outperform any1 investing dollar for dollar in their bank than if i would invest in the S&P.

[/ QUOTE ]

How about bonds though? That's one of the real issues in my mind. The other real issue in my mind is your investment "strategy." Are you going to make periodic buys at a constant rate, are you putting in a lump sum and waiting 45 years, are you buying individual stocks, or just the S&P?