When a friend recommended reading The Ponzi Factor, I was naturally skeptical. I try to stay away from books that actively propose an idea because it seems like propaganda. However, upon repeated insistence by my friend, I decided to give The Ponzi Factor a listen. (I listened to it on Audible.)

Having read it, I can confidently say that the book is a delightful, contrarian, and iconoclastic read for anyone interested in personal finance, and investing in stocks in particular. Below are some of the key ideas from the book. It's not a summary, but rather book notes. Hope you enjoy it :)

  1. Investing was earlier investing in a company so that you get dividends from the company's profits. It was never investing as we know it today, where you buy shares of a company but you never actually get your share of profits from the company's profits.
  2. The value of your stock is determined by what other investors are willing to pay, and the actual money that you get once you sell your stock is money from other investors.
  3. SEC defines a ponzi scheme as follows: "A Ponzi scheme is an investment scam that involves the payment of purported returns to existing investors from funds contributed by new investors."
  4. Thus, the "value" of a stock is a cerebral idea.
  5. Fact: There is only $1.7 trillion floating in the US economy and ~$3 trillion in the entire economic system. How, then, can the stock market be worth $36 trillion? (Numbers are bound to vary now b/c of Covid.)
  6. There are a few key fallacies:
  7. We can be miseducated about shares, but we should not be brainwashed by finance professionals.
  8. The biggest scams are legal
  9. The principle of accrual accounting lets you report profit even when you haven't made any profit. Case in point: HB Onyx (where Tan Liu worked)
  10. We have these false ideas about finance and investing because of universities. They are to be blamed as they propagate false ideas about stocks.
  11. Any economics class's model works on fixed assumptions. This lets us be correct 9 out of 10 times. However, the first time that you are wrong (ie the 10th time), you end up wiping your gains from the 9 times you were "correct." (This is related to Taleb's idea of The Black Swan.) For example, a change in the interest rates can significantly change the correlation between two variables, even turn it around.
  12. You can forecast direction or timing, not both. Never say that the market will move up in April. For example, say the market will go up, not "up in April."
  13. Investing in the stock market is identical to gambling.
    1. At its core, the principle is the same: Both activities want to make more money with money.
    2. In the 1600s, the word "invest" was used and it referred to land, something tangible, not something as synthetic as financial instruments.
    3. Something is called "investing" when there is a quantitatively predefined advantage for the investor; gambling is when there’s none.
  14. The definitions of specific words are misused in finance
  15. 60% of mutual funds play with stocks
  16. The greatest enemy of knowledge is illusion of knowledge
  17. A zero sum game in theory is actually a negative sum game in practice, because of hidden fees of middlemen and traders
  18. He says that finance professionals are faux scientists who believe that a valid scientific idea doesn’t require a proof. Science has theorems (proofs or facts that hold in their defined universes) and theories (ideas for which we have experimental evidence, but which haven't been proven). Finance is not a science because it does not have theorems and theories — everything varies.