S&P 500 Joke | Ponzi Factor | V-Log 5 (Thesis Part 1)

Hello everyone. This is Thanh again. Thank you for joining me, and today we are finally going to get into some real research. Not just that current event stuff, but some real stuff.

Before I start, I want to mention I have not forgotten about the episode I want to do about my meeting with the SEC last month. I am waiting for the public transcript for the meeting to come out, and once that's out, I will be going over it because I definitely said some interesting things in there. I also may the chairman say some interesting things; maybe that's why it's late coming out.

Anyway, today's vlog is going to be actually one part of a series of vlogs based on a thesis I'm doing from a master's program. I mentioned this in my vlog too about how no one knows the actual returns to equities. So, no one actually knows this. It's a big mystery as to how much money did stock investors actually make.

There's a paper published in 1985 called the equity premium puzzle, and it basically started a debate about how to calculate the actual real returns to equities, stocks. There are actually many different philosophies on how to calculate this. From the very beginning, in my book, I said there's no database that keeps track of investor losses.

I didn't, however, when I put that in my book, realize that this question of how much stocks have actually returned was so highly debated, even with people who believed in stocks. So the question now, then you may be wondering, is if no one knows how much money stocks about should return, why do people think that it's actually given investors back something positive?

Well, this goes with something I disclosed in Chapter 4 and Chapter 5, which is there's a lot of false academic teachings out there. As in, academics like this guy John Cochran discloses fundamentally flawed ideas, and he teaches at the University of Chicago, which is a really good school.

I'm gonna play a portion of his lecture, and I want you to pay attention to a couple of things. One, he talks about facts a lot, and he talks about theories. Nothing he says is really factual. Things, here he is calling theories, are not theories at all.

Furthermore, he talked about how they build theories on top of facts, but the very fundamental fact that he's going to explain is also completely false, and I'm gonna explain why in a moment.

Asset pricing is based on facts. It's sort of like astronomy; we think we knew what was out there, and then when we go look at the facts, it's unimaginably weird, and then all our theories have to change. When we develop the theories, I want to develop the theories on top of the facts.

So, first set of facts: facts about stock markets, the equity premium, risk and return. On the first picture I've shown, the total return on the stock market versus bond market. So this is if you invest $1 in 1926, how much money do you have at each date? As you can see, stocks earned a whole lot more than bonds.

Fact 1: Stocks paid a lot more than bonds. As you could hear, he talks about fact, and he keeps saying, "This is how much money you would have at each given date." That is not a fact at all. Either I debunk that in Chapter 5, where, no, this is not real money. This is not real money. This is not real money. This is not real money.

This is an imaginary piece of paper you have. What you actually have at each given date is negative $1 because that's what you spent on the stock, and you're holding nothing but an imaginary paper at this point. Everything else he said here is also wrong for the following reasons.

He portrays this as returns to stocks, but the reality is this is not the graph for the returns to stocks. This is actually the graph for the S&P 500 data. The reason I know that is because I came across the S&P 500 data from this guy on his website, Oz Bothh.

So here's the problem with the S&P 500. Most people don't realize this: the S&P 500, of course, is based on 500 stocks. But think about this—some of the stocks on the S&P 500 today are Apple, Google. Those companies were not around back in 1928. There are certainly a lot of companies that were around back in 1950 that aren't around now.

So what happened to all the losers? You're asking: what if a company that was on the S&P 500 went out of business in 1960, 1970, or 1950, whatever, right? Well, the answer is they just ignore it, as in, "Oh, this company went out of business. Well, let's just replace it with a new one."

This is actually not the return for any basket of 500 stocks. It's not the return for the whole stocks, nor is it the return for the 500 stocks on S&P on any given period. It's actually based on about 500 best stocks in the stock market, and the thousands—we're not even talking about thousands, maybe tens of thousands, or hundreds of thousands of stocks that got delisted from the market over the past nine, eight years.

Yeah, they're just not in this calculation, and they just totally ignored it. So you can immediately understand why this is total BS, right? It's based on survivorship bias. It doesn't represent the market as a whole, and Mr. Cochran here, in one of the earlier finance classes that he's teaching at the very nascent level, is going around telling people how this is a fact, how this is how much stocks have returned.

Now forget about me being the critic and trying to make their lives difficult. Even the people who wrote papers that are published in this book here, that are hardcore finance people, will say that this lecture he's giving and what he's saying is a complete joke. So it's not just me.

That's the heart of really what I'm researching, which is what are the historic returns to equities? And of course, I'm gonna challenge and debunk the ideas that these people publish in their book, because I can, and that's what I do.

Now, in addition, I'm also going to share some other research where I'm gonna formalize some of the ideas I've actually said quite a few times, where a lot of people like to say, "Well, stocks might not be real money, but I can just cash it out for real money whenever I want." No, you can't. If you log too, I mentioned this already, where typically every single day, only about 1% of the total shares outstanding are actually being traded.

Well, only 1% of the shares outstanding are traded, and why do 100% of shareholders think you can cash out whenever you want? Clearly, you can't. So I'm gonna call that the absence of liquidity theorem, and it's basically gonna formalize the explanation that I just gave.

That's of course gonna bring into the market a formula which I already debunked in a vlog too, and it's going to debunk and play a role in the total returns formula as well because capital gains assume that everyone can cash out whenever they can. Capital gains is part of the total returns formula, and that's total BS, right?

You destroy the market cap for me; now you destroyed the total returns formula, and you destroy the beliefs and lives of everyone I just mentioned. So that's what's at hand.

Bottom line is this: no one knows how much money people have actually made in the stock market. I mentioned how there's no database that tracks investor losses, but now you also understand that this is actually a very highly debated subject even amongst finance academics who actually do real research.

We're not talking about the Cochran's or the Oswalt's. About the people who look, in ICF, a book I mentioned. If you hear somebody say the stock market has returned 8% per year, blah, blah, blah, something number-wise, they're full of it, okay? They don't know what they're talking about.

They've been listening to many AHS losses; they've been listening to many Cochran. So now you know the truth. Now you can go out there and destroy the lives of many finance professionals and professors. Happy hunting!