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Jan. 18, 2007 - Freedomain Radio - Stefan Molyneux
50:53
605 Protecting Investors
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Hello, darlings!
It's Clock Me Steph here. Hope you're doing well.
Time for us to have a little chat about the stock market, right?
So, I wanted to talk about stocks, and I know it's a shocking break from our theological-slash-philosophical discussions of late, but I wanted to have a little chat about ye olde stock market for the benefit of a listener who is wrestling with the problem, yay, as Jacob doth wrestle the angel.
Ooh, I knew I'd slip a little theology in there a little bit, but we shall move on with the stock market.
The question that the listener, long-time listener, has posed, which is a very interesting question, when you sort of stewed yourself in anarchistic philosophy for quite some time, it's a little hard to understand what The challenge is in reproducing this kind of thinking, so I did a probably fairly poor job of trying to make this sort of more or less clear to this gentleman today.
So I will try to do a better job remembering that some people who are newer to these ideas are going to have a little trouble putting them into practice.
And this one is particularly tricky for this fellow because he is interested in the stock market, is invested in the stock market, and has lots of friends who are statists and horrified by Enron and WorldCom and all this kind of nonsense.
And are happy that these people are in jail and so on.
And I understand all of that.
It's tougher to make the case for anarchy.
When people feel that they have already suffered from anarchy, right?
That's a great challenge that we have, right?
The sort of two things that we face, the major challenges in my book, is that people think that anarchy is the Molotov cocktail-throwing nonsense that goes on in popular stereotype.
And the second is that people think that the bad things that happen in their life happen because people don't obey the rules that the government sets forward.
And therefore, of course, if you got rid of government, then things would be even worse.
So... I wanted to go over the stock market protections that would occur in the realm of the stock market.
Stock market is a key aspect, of course, of capitalism.
It allows you to sell shares, raise money for expansion.
Stock markets generally occur in the public, in other words, in the sort of public sphere, not the government sphere, but the public sphere.
And they also occur in the private sphere, of course.
I mean, there's a mini stock market any time an entrepreneur runs around to aunts and uncles and brothers and sisters looking to raise money to start a business.
The business that I started in the 90s was funded to the tune of, well, actually, I don't have to get into the figures, but it was lawyers and dentists and accountants and so on who had some money kicking around who wanted to ride their way.
And ride the wave they did.
And ride the wave they did.
3,000% return on investment in a few years.
Not too shabby.
So we'll just pretty much deal...
With the public sphere, the stock market sphere that is what we all are aware of, the NASDAQ, the New York Stock Exchange, the Alberta Stock Exchange, and so on, so that we can keep things relatively uncluttered.
But the stock market is no great special animal.
This is an important thing to understand.
There's nothing weird or mysterious about the stock market as a whole.
And there is a certain amount of profitability that's involved in that, and I can sort of understand that, but the thing to understand about the stock market is fundamentally it's exactly the same as any other loan, right?
You loan your money to a company, and you hope to get...
Interest back in the form of dividends.
You lend a company $100, it uses that $100 to invest in plant machinery, makes $120, keeps $10 for itself, gives you $10 back, and there's your 10%.
It's really not that complicated as far as that goes.
There's no weird or special thing that occurs in the stock market that is wildly or fundamentally different From any other loan that occurs.
When you go to a mortgage, then the bank is essentially investing in you.
They're investing in you.
They're giving you a loan or giving you a house and hoping that you use the shelter that house provides to rest and so you can return to your labors and make money to pay off the house and the additional time value that the bank has given you.
The time value being that having a house now is better than having a house in 25 years when you've saved up for it.
You get to use the house in the meantime.
So, there's no great difference in the stock market than any other kind of loan.
All the way from a simple loan like your brother asked you for 50 bucks for the weekend, all the way up to you have decided to invest a billion dollars in purchasing some company.
It's all investments which are designed to produce revenue.
Now, of course, with your brother, it's likely that you're just going to get the money back, but there'll be some goodwill, and the other thing that you're going to get is hopefully some form of reciprocity, should you ever be short of shackles.
This is going to be the alliteration podcast, actually.
So... That's the basics to understand.
You're lending money to a company and the company's paying you back money in terms of interest.
That's all that's getting back.
Interest in the forms of dividends or interest in the forms of not dividends.
There's two kinds of shares in general, right?
There's like shares which pay dividends and shares which have voting capacities, right?
So you can vote about the board of directors and so on.
And sometimes class A and class B type shares and that's sort of the extent of my knowledge about it.
But So you get some rights.
You know, you get a vote. But of course, anytime you have a big investment in anything, you get a vote, right?
I mean, if your bank is investing in you having a house, they have a vote as to whether or not they're going to let that loan continue.
I mean, you have a contract and so on.
Whether they're going to renew it, of course, is up to them.
They have a pretty significant vote in what happens in your life.
That's only, of course, because they're providing a pretty significant benefit, which is roof over your head and so on.
So as far as stocks goes, the most important thing to understand fundamentally is just a loan.
It's just a loan.
Now, loans in general, though, I mean, this is the tricky thing where trust becomes an issue.
The difference is that normally a loan goes from a large solitary institution to a large number of smaller institutions, whether they be Sort of private people looking for car loans or house loans or whatever, or smaller businesses. But generally, one bank has thousands or hundreds of thousands or millions of customers and it will make loans to some proportion of those.
And so you have one large entity making loans to lots of small entities.
And therefore the trust really is not that big a deal.
The bank has to trust you, which is why your credit rating is so important.
But banks generally know that a certain percentage of loans will be, as they call it, underperformers, right?
And of course, some loans will go completely defunct, which enormously raises the price for everyone else, right?
If a bank has one loan in 100 that goes bad, then the other 99 has to have 100 then go perfectly to make up for that.
So it's risky for a bank to lend money to you.
And entrepreneurs sometimes don't feel all too hot and bothered about putting up the kind of collateral that a bank wants when you want to invest your money.
It's a bit too sweaty, right?
So if you're an entrepreneur and you want to raise $50,000 and you go to a bank, the bank's going to say, hey, no problem.
How much is your house worth?
And then if your house is worth at least $50,000 or at least $50,000 of it is paid off, Then you can get the loan.
Should said loan not be paid back, then the bank will take your house or some portion thereof, and you'll have a banker living with you, and that's no good.
So what is important to the stock market and what is different about the stock market is that the stock market, and we're just going to take a very generalized, a bit of a black and white view here.
So I apologize for the oversimplification, but I think oversimplification is kind of where I live intellectually.
So So... The difference is that instead of there being one entity that is loaning an enormous amount of money to a highly diffused market, lots of different businesses and customers, sort of investment loans and car loans and house loans and so on, the difference is that in the stock market, it's completely the reverse.
You have lots of small and diffuse lenders lending money to one large monolithic institution.
So if I decide to invest in IBM and I lend them $500, then it's like 0.001% of their market capitalization.
It's not an insignificant amount of money to me, right?
So that's the difference.
The reason that trust becomes such a central issue in the realm of stock markets is that you have lots of small people lending to one large institution.
I mean, this is, again, simplifying.
I know people have lots of stuff in their portfolio and so on, but we're just looking at it.
Instead of one bank lending to 10,000 people, you have 10,000 people investing in one company, lending to one company.
So that's a bit of a different situation, and the trust that is in there is quite a bit different.
The bank can be a little bit more discriminatory about who it lends to, because everybody needs a house and everybody needs a car, and most people borrow to pay for these things over time.
And so if the bank says no to someone, well, you know, not the end of the world.
And the bank will sort of continue on, and somebody else will pop up.
To lend, that it can lend to.
And the same thing is somewhat true with the stock market in that you're an investor with 500 bucks burning a hole in your pocket and you've got thousands and thousands of companies that you could invest in.
You choose not to invest in one and move on to another one and so on.
But the situation is just a little bit reversed and I think that's sort of important to understand.
Now, a bank is not going to lend to you Without a credit report, or if it is, then it's a bank named Luigi who runs the pinball arcade down at the corner and never seems to be at work.
And so, your personal credit history, your credit worthiness, your credit rating, is what the bank uses to determine, A, whether you can be trusted with money at all, and B, to what degree can you be trusted?
What's the risk factor? In other words, you'll get a preferential rate if you pay back your bills.
You don't pay less in interest because your risk is lower.
I pay back your debts.
Now, what happens in the reverse is that a company has an investment worthiness.
So you have creditworthiness when you go to borrow money from a bank, and a company has creditworthiness, in a sense, when it wants to go and borrow money from the stock market.
And these are called 10Q or 4Qs or they're called annual reports or they're called audited results or whatever.
Any company that is a public company is going to have masses of financial indexes that are available.
Earnings before depreciation, interest and taxation, earnings after those things, profit margins, quick calcs and all these kinds of things.
The whole profit waterfall that occurs, like income comes all the way in, and then it sort of trickles through all of the aspects of the company, and some gets hoovered up by sales and general administration, and some gets consumed by overhead and utility bills and all this.
And then what pops out at the end is profit, and part of that profit is used to pay back the loans, whether they are from a bank or from a bunch of investors that have been made.
And the investors may want money back as dividends.
They also may want money back in terms of, well, my goal is not to have my house produce income, in a sense, every month or every year.
So some people buy houses, and they then get roommates or boarders, and the house then produces a certain amount of income every month when those people pay their rent.
And that's sort of like dividends.
On the other hand, you can buy a house in order to hang on to it for 10 years or 5 years or whatever, and then flip it and make a profit.
And you don't want dividends.
You don't want borders. I mean, you might rent out the whole house or whatever, but let's not overwork the metaphor.
At least let me not overwork the metaphor.
So what you do is you buy the house, you maybe renovate it or whatever, and then you sell it again.
You might just sit on it and sell it.
You might live in it and then sell it.
And that's people who buy the stock and they don't want dividends.
What they want is for the stock to go up in value.
And when the stock has gone up in value, then at some point they will sell it to somebody else who, you know, at some point the stock will split, which means that when a stock price gets to be too much, so when a stock price gets to be like $100 or $200, then it becomes hard for people with $500 to own more than a share or two.
And so what they do is split the stock, thus halving the price.
So where you had 10 stocks that you bought for $100, you now have 20 stocks.
And you can sell them for $50.
They've just become a little bit easier to trade, and there's other reasons why that's done.
So the difference is that if you lend money to a company, you can either take out the interest in the way that you would get a rental from borders in a house, or you just hang on to the stock.
Don't take the dividends or the interest from the company, which allows, in an ideal world, it allows the company to invest back into its own profit expansions and, you know, open up a plant in China or whatever.
Which, in turn, will generate more money.
So, if you take all of your investments and you plow all of the profits back into more investments, the idea is that you're going to make more money in the long run.
If you take half of that money out and go spend it on pinball machines, hookers and blow, then...
You may have a little more fun in the short run but you will end up with less money in the long run.
So that's sort of the balance that occurs when you lend money to a company in the form of purchasing shares.
So the trust issue is pretty considerable.
The bank has to trust you to lend money to you, so they'll look at your credit history.
Do you pay your debts back on time?
They have a right to ask you about your income.
And even in a free market society or Ancapistan, they would have that right, I would imagine.
I mean, anything's possible in Ancapistan, right?
Everybody's always worried about, well, why should the bank have a right to know how much I make?
Well, they don't have to. But if you don't tell them or don't allow them to verify it, they'll just charge you more in interest because the risk is greater.
Because the risk is greater.
How likely are you to show up for a blind date when you know nothing about the person you're being set up with?
Not even their gender, let alone a photo, let alone their age, let alone anything.
Versus if you get to see a photo and she's, I don't know, Miss December, then your likelihood may go up a little bit more.
If you're Rosie O'Donnell. So that is a pretty important thing to understand.
The more information you share, the more you motivate other people and the more you reduce their risk and the less they're going to have to charge you, right?
So the revealing of your credit rating to the bank in order to get them to give you a loan at a good rate, maybe a point or two above prime, that's your minimization of risk.
And in the reverse way, when a company wants to borrow your money, what they do is they publish their financial results.
This is their credit worthiness.
This is their credit history.
Basically, it's an indication of their ability not only to pay your principal back, in other words, the share price is going to rise concomitant with inflation or whatever, so that if you put in 50 bucks, you'll get 50 bucks back in real dollars.
You know, five years from now.
That's the minimum.
Of course, nobody's really going to invest like that.
I'm just sort of saying, right, that not only do they have the assets to be able to pay you back, but they have the growth in earnings and the imagination and creativity of the CXO group, the chief executive officers and, you know, emerging markets and a hungry workforce and all that.
I mean, hungry, not like hungry, hungry, but, you know, motivated workforce.
So they will say to you, well, you know, we...
We only spent $2 billion, but we sold $3 billion worth of goods.
And boy, if you lend us some money, we'll turn that into $4 billion worth of goods with only $2.5 billion worth of overhead.
And out of that $1.5 billion in profit, silly numbers, I know.
This would be more margin. But out of the $1.5 billion in profit, we'll be able to pay you back your interest, your principal and interest in spades.
Or the value of your stock will go up to the point where you'll make a killing and you'll sell it for double next year and so on.
That's the idea.
We need your money. We want your money.
We will pay you back the interest for lending us your money and that's going to be dividends or the increase in the value of your shares.
So the challenge is can you believe the financial reports that the company is putting forward?
Can you believe the financial reports that the company is putting forward?
If you go to the bank and you sit down with Mr.
Bankster and you say, Hey man, I've totally got a good credit rating, dude.
And I got it written right here in crayon.
And it's like the man leans over and says, I'm sorry, sir.
This is actually a bad credit report with the word bad crossed out in crayon and scratched in with an all the word good.
And I'm afraid that's not going to be quite good enough for us.
Or if you say, yeah, I brought my old lady with me here.
She's totally going to give you a good review.
I paid her back for, what was it?
It was like 70 bucks that I borrowed from her, and I totally paid it back, didn't I, baby?
And you've got her in a half Nelson or something, right?
Then the banker is going to say, well, that's all well and good, but I'm not going to count that to be an objective assessment of...
Your creditworthiness. It has to be somebody you don't have in a half-Nelson or a headlock or something like that.
And that's why mom is usually not put down as a character reference.
Certainly not my mom. Ah!
Where? Did someone see her? Anyway, never mind.
Just breathe into the bag, Steph.
Breathe into the bag.
So, can you trust what the company is saying about its own finances?
Because here you have a fairly important reversal of the money flow, right?
So, if...
The bank is lending to 10,000 people, then, you know, any one of those things going wrong, not the end of the world.
And so each one of those people doesn't have a huge or massive interest in faking a credit report.
Just to get some money, and, you know, it's only going to work once, and you're not going to get that much money, and it's a hell of a lot of work to fake the credit report, and so on.
But you could. You could absolutely fake a credit report or you could bribe somebody at the credit rating agency, even now, to make up a good credit report or go in and change those numbers for you.
And there would be an enormous amount of incentive for people in there.
And I'm sure they have checks and balances at these places.
But anyway, you could ask someone or demand that someone put that in for you.
And what would you get? What you'd get a loan for a couple of grand or 10 grand or 20 grand or whatever.
And so, yeah, there's something around.
On the other hand, though, if you're a company that can bullshit your way through to an inflated earnings...
Well, then you get thousands and thousands of people to lend you money, right?
So it's like a black hole.
One is a supernova, right?
The bank is just ejecting money out into the marketplace to lend to people, and it's a bit of a scattershot, and each individual and their creditworthiness is important.
And in the aggregate, it's all extremely important, but each individual is not the end of the world.
Somebody fakes their credit report, and the profit to them is not massive, and the loss to the bank is not enormous, because it's diffused, right?
The risk. But for a company, on the other hand, it's quite different.
The chief executive officers, whose pay is often tied to stock performance and so on, if they can lie credibly about their company's performance, then they're going to get a whole lot of investors.
A whole lot of investors.
There was a gold company, was it Barrick Gold or something, a couple of years ago, actually more than a couple now, in Canada.
They faked all of their gold assays, right, and thought they'd found the biggest mine in history until this Guzman fellow took a walk off a helicopter, probably because the people who he had dealt with, who probably were a little on the shady side of the law, were not too pleased with his behavior.
There's a head geologist who'd certified this stuff, and he just dropped his gold ring into an assay or something like that.
Oh, look, lots of gold, let's make a fortune.
And that's really the challenge, that if you can fool 10,000 people into giving you $1,000, well, that's $10 million right there.
Is that right? 10 people, 1,000...
Anyway, it's a big sum.
I'm sorry, I can't carry the zero while I'm driving and holding the microphone.
So there's a rather large imbalance, right?
You lie about your credit report from the bank.
I'm sorry to labor this. I just really want to sort of get this to be clear.
It'd be easier with a whiteboard, but that's not until the next podcast.
But if you fake your credit report, the bank's going to just lose a little bit of money relative to all of their other loans.
But if you're the head of a company and you can get people to believe that you made a whole bunch of money that you didn't make, Then the profit that accumulates to you, the unjust, ungodly profit that accumulates to you, that's pretty significant.
It's pretty significant.
I've been on the receiving end of this shotgun of money and it really does knock you right off your chair.
So there's great temptation, naturally.
And the real challenge, of course, is also the bank pays This is the other imbalance in terms of trust in the stock market.
The bank pays for the credit report.
If you go and apply for a loan, they don't say, oh, by the way, we need 50 bucks to process a credit report from you.
They don't do that. They pay for the credit report, so the credit report people, they work for the bank.
And so who's their primary customer?
Well, the bank, right?
So they don't want to screw around with the bank.
They don't want to give bad credit ratings where good credit ratings are deserved because then the bank loses business to other people and also they get complaints from people about their own credit rating system.
But they also don't want to give good credit ratings where there is actually bad credit because then the bank will give a loan, lose money and stop using their services.
So the bank is paying and so the bank calls the shots.
In terms of quality. Things are quite different in the investing world.
If you've got $500 to invest and it costs, I don't know, $100,000 to audit a company, let's see, you carry the one minus, that's not really a very good investment to say, okay, I'll spend the $10,000 just so that I can invest the $500.
I think you've already got a bit of a loss right there.
So that's really the challenge.
Now, who then is going to pay for the audit of the company's finances so that you don't just sort of listen to the CEO saying, yeah, a whole bunch of money.
It's in piles in the basement.
Give us your cash. I got your daughter.
Give us your cash. So, if it costs a couple hundred K or more to audit your company, that's paid for by the same executive team that will profit enormously if the So that's really the challenge of the stock market.
The people who stand to profit the most from falsified reports of a company's performance are the very same people who are paying For that report.
Ah, excellent, Smedley.
I think we have intense possibilities of corruption and not in the kind of way that I like with a lithe young Indian boy and some peeled grapes.
And that's really the challenge.
And this imbalance is fairly well understood in investing circles.
How can you trust the sleazy, mustachio-twirling CEO who flies in in a Learjet to say that the company is doing well?
Well, if you're flying in in a Learjet, your company may not be doing as well as it could be because you have a Learjet.
So this is a great challenge.
And how do you solve this challenge?
How do you...
You! You right there.
How do you solve the challenge? Answer me, dammit!
Because I don't have a clue. No, I'm kidding.
I do have a clue. Maybe a clue.
Let's see. Well, companies need the money.
They want your capital.
And they know that you don't know them from Adam, and you don't have any clue Whether or not they're profitable.
You have no idea.
And that it's not worth your time unless you're some monster institutional investor.
It's really not worth your time to figure out whether this company's worthwhile or not.
What was it? There was some company, I can't remember, Allstate or something, they had these series of commercials where they would go to some half-retarded clowns business where they'd be running around like chickens with their heads cut off and say, huh, maybe we won't invest here.
Because the guy's, you know, got his tie wrapped around his head and is running around in a ninja suit.
Oh wait, that was my company. I thought these guys were familiar too.
So if you're an institutional investor, yeah, you'll go in, you'll interview with people, you'll do this, you'll do that, and so on.
And if you're on a board, a board of directors is somebody who has invested in the company and then gets to look at the pipeline and watch the sales activity and make sure the money's being made and they're there to give advice and introduce you to people who will be useful to you and so on.
So the question is then how do these checks and balances occur?
Well, it's important to remember who the real customer is here.
The real customer is not the investor.
Just remember, when you go to the bank and you ask for a loan, you're the customer.
I mean, the bank's the customer of your future interest payments, but you're the customer.
And things are reversed in the stock market.
In the stock market, the customer...
Is the investor.
I'm sorry. In the stock market, the person who wants the benefit, the person who wants the benefit is the company.
When you go to the bank, you want the benefit of the loan.
When a company goes to put stuff on a stock market, it wants to receive the benefit of other people's money.
And so, the real challenge is then, well, how do the sellers...
Satisfy themselves as to the creditworthiness of the customer Now, nobody has to invest.
It's a very fundamental thing to understand.
This is going back to the third podcast or something, but the stock market that we have right now is completely mutated.
Go back and listen to Stock Swindles if you get a chance, if you're interested in this kind of stuff.
We have a completely mutated, swollen, ugly, distorted, weird, vicious, subterraneanly, randomly, god-awful stock market at the moment because The government herds dollars into the stock market like some sadist is going to herd lemmings off a cliff.
You've got government debt.
You've got taxation, investment.
You've got massive union spending on stocks and bonds.
You have regulatory controls over the transfers of companies and mergers.
You have unemployment insurance, which is heavily invested into the stock market.
Social Security, heavily invested into the stock market.
You've got government spending in weird sectors like Like the military-industrial complex totally distorts the free market in terms of investment and rewards.
You've got government controls of fundamental things like oil and gas and other fundamental materials.
And I don't have to get into the whole mess of it, let alone the incentive structures and the government subsidies to various companies.
Our stock market is a barely recognizable shadow in the platonic sense of the real stock market that would occur in a free market where stock price and stock direction would be much more indicative of real profit and growth.
So it's impossible to compare what's going on in the stock market at the moment with What would go on in a rational one?
And sort of the basic thing is because there's such an enormous amount of money that is herded by the government into the stock market for obvious reasons, right?
Capital gains, taxes, and also that the more money that's in the stock market, the more money is going to be available for the government to borrow.
Some of it goes into capital markets, some of it goes into other kinds of markets.
But the government herds your taxpayer dollars into the market, into investments, so that they can borrow money, right?
So the banks end up with lots of money.
So anyway, it's just another tax.
But because there's such an enormous amount of money sloshing back and forth in the stock market at the moment, it's much more than would ever be there.
It's all speculative money, and it's much more than would ever be there.
Oh, not to mention RRSPs and 401k plans and the tax shelters that are set up if people do invest in a stock market.
I mean, it's all just monstrous what goes on.
Because there's such an enormous amount of hypercharged money charging back and forth trying to find a home in the stock market, trying to find any cliff or cleft of profit in the stock market, Anybody who posts an improved quarter is going to get a surge of money their way, right? So think of it like, you know, these Soviet athletes that used to drain their blood out and then pump up their blood by injecting it back into themselves.
Think of that, but like somebody bloated up to the size of the Michelin Man, the size of the Statue of Liberty.
That's the stock market in terms of its overcharging with capital pretty much since the 1930s, and particularly accelerated in the 1960s and 70s.
So right now, because there's such an enormous amount of money looking for any profit discrepancy, any profitability information to invest in to get a quick hit, you have executives who've become a slave to this tsunami of hungry capital swishing back and forth, sloshing, thundering back and forth across the capital markets looking for any profit whatsoever.
And that temptation is simply too great.
This would not occur. In a private or a free stock market, because the only people who would be in there would be speculators who would pay their own foolish price and investors who would have some clue what was going on.
But it would be much, much, much, much less than what's going on right now.
So the company needs your money, and you don't have to give the company your money.
You do not have to lend, because this is freedom, right?
This is a free society we're talking about.
This is a DRO society, Ancapistan, Anaco Capitalism, Von Lendingness.
So nobody has to give you the money.
You're some hungry CEO looking to get some cash in your pocket to invest and grow your business.
Nobody has to give you a penny.
So you have to overcome the inertia.
Of people saying, I got my money under a mattress.
It's all in gold.
In fact, it's gaining value every year because I've got it from a DRO who's making sure to protect the value of my currency.
It's not fiat. It's real money.
So, you know what?
I'm fine. I'm totally fine.
My money's growing on its own.
I really don't...
I got it stuck in a bank.
I'm getting 5% interest.
And the real prices of things, just as they did in the 19th century, are dropping...
Pretty considerably so. You know what?
I'm making a fortune anyway, so I really don't care.
I really don't care, right? If you didn't have weird tax structures, 401k tax shelters, RRSP tax shelters, fiat money, government loans, blah, blah, blah, people's money would be increasing in value as it did in the 19th century in America when you have a sort of real money.
It's a bimetallic currency. So people are making money anyway.
You've got to overcome that inertia, right?
That inertia of like, yeah, I guess I could read your prospectus and I could figure out what your company does and I could do this and I could do that.
God, why? Why would I want to?
Why, why, why, why, why?
I'm fine here on the couch scratching myself.
Ooh, damn, it's hard with this microphone in my hand.
and I don't want you to hear that sound.
So, uh, the...
I think we hit a new low there.
Should we just take a moment to observe it?
Low... Yes, that's lovely.
I thought we couldn't, but apparently you can hit the center of the earth, keep digging, and actually get deeper.
It's good to know. Bigger than we thought.
So you've got to overcome the inertia.
Now, right now, the capital is chasing the companies because the government's hoded so much capital into the market that it's like a mad stampede trying to look for...
It's like a mad, angry bull looking for bullfighters, right?
A horde of them. A horde of bulls, not bullfighters.
That's actually called a herd. So it would be quite different in a free market because there'd be not a lot of capital looking to invest.
Some people would want to, of course, right?
But not what it is right now.
Right now, it's a seller's market for stocks, fundamentally, because there's so much money looking for profit.
Heard it in there by the government.
But it's different in a free market.
In the free market, I don't want to invest.
I don't want to be a pirate.
I don't want to invest in your stocks.
So, you're not going to do anything.
Why would you? I'm sitting here fine.
My money's accumulating. I'm doing good.
Hey, friends, it's on. Forget it. So you actually have to make people want to and convince them in a very positive and productive way that they should spend money on your company, that they should lend you the money.
And so basically, it's sort of like you're an employer in a town and everyone just won the lottery.
That's what it would be like trying to raise money in a free market.
Well, yeah, you could get people to work for you, but man, you'd better make it attractive.
There's really topless swimsuit models and back rubs and, you know, they're going to work 20 minutes a day, and the rest of the time they, you know, you're teaching them yoga.
It makes them so limber they can blow themselves.
So it's pretty tough to compete in a market where people are already satisfied with what they've got, right?
It's really tough to create demand when there is, in fact, no demand.
So, in a free market system, the people who are trying to raise money, they have a tough time of it.
And so, they already have that hurdle.
And then the other hurdle is, why should I believe your lying scumbag CEO face?
Why? Why? Not only is my money doing fine and I'm gaining money just by sitting here scratching, but why should I believe your lying CEO face?
So, this is a huge issue.
So how is it that you are going to get people to give you money when they have very little incentive to do so, unless they're just madly greedy or whatever, or they're just sort of a natural-born investor dude or dude-ass?
Well, you're going to have to find some way to convince them that you're not lying to them, right?
I mean, that's pretty key.
You have to find some way to convince them that you're not lying to them.
And how are you going to do that?
Well... What happens is that it's exactly the same way that the bank does.
What happens is you hire somebody who is independent of you, some credit rating agency, you hire somebody who's independent of you, and they then do an audit and they tell you whether or not you're creditworthy.
They tell your investors whether or not your claims are true.
Or whether you're a software salesman.
And the moment that people feel, even to a tiny little bit, that what you're saying is not true, then they vanish.
Yay. As the very fog at dawn.
So what are you going to do?
You've got to find somebody who is going to have enough credibility that the investors are going to believe them, not you.
And you're going to have to find some way of figuring out how you are going to ensure that or convince the investors that there's no conflict of interest.
Right? That there is no conflict of interest.
Right? And I don't know.
I mean, I'm no expert in this area, but you could come up with some sort of basic ideas that there would simply be a bond that was posted, right?
So if the company posts a million dollars in the bank, and then that gets distributed to the first investor that finds a falsehood in the statements.
I mean, this is just stuff, right?
You just post a reward.
These are how you solve things in a seller's market, right?
When it comes to, what the frick is this guy doing?
Bizarre driver. He's taking a left, but from the middle lane.
Completely bizarre. Things you do not expect when you drive.
So, yeah, you post a reward.
I mean, there's one way you could do it, right?
It's like the amazing Randy with his million bucks for psychic phenomenon thing.
Shuts up a lot of boring people at parties.
I'm so psychic. Hey, go make a million dollars.
Well, I don't use it for that.
So, that's sort of one way that you could do it.
But another way that you could do it, and this is sort of a fundamental thing about...
The longevity of companies is that there's sort of a basic economic calculation.
And when I was at a company once, this sort of witch of an office manager who processed my expenses would say, you know, I don't know, I'd lose some expense for like a $20 meal or whatever, and I'd just have it on my visa, and I'd bring in the bill or whatever.
And she'd be like, oh, I don't see how we can prove this happened on business or whatever, right?
And for me, it was like, yeah, that's right.
I have spent my whole career and done all this travel, worked 70 hours a week when I was an entrepreneur and so on.
I've done it all just so I could get here to rip off this company for 20 bucks.
That's been the big master plan.
And we've all been in those kinds of situations, right, where somebody has accused us of something underhanded where the cost-benefit would just be completely ludicrous.
That's been my whole goal.
That's exactly right. I have plotted, yay, these 20 years so that I could steal 20 bucks from this company, and that's why I put in all this overtime.
And, you know, we've all been there and had these ridiculous accusations and so on.
So this is a very sort of fundamental principle that we're keying into here, right?
I mean, if $5 million went missing, then, yeah, maybe I would have worked at the company for a year or two to steal it or whatever, but, you know, these kinds of thefts.
Never really make a whole lot of sense.
And this is an important thing to understand.
And this is the value of large rating agencies, right?
In the DRO world, this will be the huge value of rating agencies.
The fantastic thing, if you have a DRO that's worth $10 billion that's been around for 50 years, and you want to invest in a company that is worth a million dollars.
So the company is looking to raise a million dollars.
And so, let's say that the company wants to raise a million dollars and they're going to pay some portion of that to the DRO. Sorry, to the rating agency.
We'll just call it the rating agency.
They're going to pay some portion of that million dollars for the DRO that is going to...
The annual reports. So the DRO will send their accountants in to review the finances of this million dollar company and say, yeah, they made a million dollars last year when they in fact lost a million dollars, right?
So they can get a million dollars of investment.
They'll give half of that to the DRO for faking the books, right?
for cooking the books.
That's the basic equation.
Well, how do you know that this is almost never, ever, ever, ever, ever, ever, ever, ever, ever, ever, ever going to happen?
Well, it's a pretty simple economic calculation, of course.
It's never going to happen because there's just no way that any sane DRO owner is going to wipe out $10 billion in 50 years of history for the sake of a half million dollars.
I mean, that's like saying, I have $10 million in the bank, but if somebody pays me $50,000, I will go and take all of that money out in nice, lovely dollar bills and burn them in my front yard.
I mean, how many people would take that?
Take your $10 million out of the bank and for $50,000, we'll burn it.
Well, that sounds great.
Well, of course, people who are that insane don't generally end up with $10 million in the bank, right?
That's how you know for sure that a DRO is not going to cheat or be bribed.
You simply choose a DRO whose market capitalization and the value of their company, what's called in business, goodwill, the intangibles, the trademark, whatever.
You simply take a DRO and only accept the word of a DRO that has a market capitalization and value that dwarfs any conceivable bribe that they could be given as a whole, as a company.
We'll get to the individuals in a sec.
We're just talking as a whole, as a company.
Because the rating agency's entire value is going to be based upon their reputation.
Their reputation for honesty and integrity.
That's all they've got.
So, if you, you know, if you basically, in the way that we talked about before, where you could go to a bank with a crayon drawing of a good credit rating, and the bank would then sort of say, oh, that's great, right?
Let's go with that. Yeah, sounds good.
You've done, you almost spelt the word credit right.
It's actually only got one D. Similarly, you could go to Bob's house of accounting DRO established three days ago.
It's got Bob and Cocker Spaniel as one of the primaries, and you could accept that DRO contract rating or accounting rating of some massive firm, but that would just be a fool and his money soon parted.
And the larger the company, the larger the DRO would have to be in order to have a market capitalization far in excess of any bribe that could be given.
And that would mean that the DRO would be absolutely deranged, mentally insane, and that those people don't.
You've got shareholders. You've got a diffuse bunch of stakeholders when it comes to that size of organization.
So there's just no way.
That that is ever going to be a policy at a DRO like that.
Now you're going to say, well, what about Arthur Anderson?
They did this and that and the other. Well, again, we're in a totally status situation.
It comes to Enron when it comes to the stock market at the moment and so on.
It's all madly distorted.
It's all madly distorted.
It's like saying people are bad because they're statists by nature without forgetting that they're 14 years of government school and all the religion and all this kind of nonsense, right?
People are irrational by nature.
It's like, well, then why do they need to have religion and government schools for years and years and years if they're just irrational by nature?
Human beings are sexual by nature, and then you don't need 14 years of propaganda to make somebody randy when they hit 13.
So we can be fairly safe in assuming that these are exceptions because of the distortions of statist influences on the stock market.
And I've done an entire podcast on that earlier, so I think I'm not going to do that again.
So it's called Enron if you're interested.
Now, there will be, of course, the other risk is that there are going to be individuals in the DRO, right?
So the DRO worth $10 billion with a 50-year history that rates the individual companies.
Well, of course, it's never going to have a policy that says, oh, yeah, we'll happily destroy $10 billion worth of market value in order to gain a $500,000 bribe.
But what could happen is that some individual within the DRO will take...
A $500,000 bribe in order to provide a positive rating for a company that in fact has no valuable assets or income.
And of course, as we all know, there's no solution to the problem of corruption except for voluntary association and the resulting competition.
So the DRO is perfectly aware of the fact that their people are going to be at risk of being bribed because of the amount of money that would be available.
The DRO recognizes that the person who is taking the bribe is someone that may make off with the money, and then, of course, the market capitalization for the DRO gets really harmed, but the person makes off with the individual amount of money.
But there's no difference whatsoever.
There's no difference whatsoever in you choosing a DRO to assess a company and basing it on the fact that the market cap of that DRO should be large enough that it would dwarf any potential bribe, the loss that they would achieve as a whole in taking that bribe, Would be greater than anything they could achieve in that bribe, and that's how you minimize corruption.
It's not perfect, but it's the best that can be achieved, and I think it's pretty damn good.
The same thing occurs for the DRO in relation to the employee that's doing the auditing.
That you want to pick a person whose market worth to be your auditor, or you want to pay that person a market worth that simply makes it unprofitable for them to take bribes.
It simply makes it unprofitable for them to take bribes.
This occurs in every situation, every conceivable interaction where corruption can occur.
You could hire, if you're the DRO, you could hire some bum off the street and have that bum go in and do the audits.
And then, of course, someone's going to give that guy a bottle of Jack Daniels and a 50, and they'll say whatever you want, right?
Of course, the DRO is going to recognize that this is not a good person who is going to be valuable at resisting bribes.
So that would be a terrible risk they would be taking with their entire market capitalization.
But what you would do in the DRO in this sort of situation is you would simply...
Make sure that the person you had going in to do the audit was well compensated.
You have a fork, sorry, you have a carrot and you have a stick.
You pay them very well and you give them bonuses on the accuracy of their information and of course you have people double check and you have checks and balances.
You have all these things. You have, especially the bigger the company, right?
And the more risky the books, right?
The DRO says, we have to mirror your financial statements in our computer system, or you have to use our financial system, and then you get a reduction on your audit, so then they can do cross-references, cross-checks, and go into all the data combing that they need to validate.
I mean, there's so many ways that you can solve this problem that I could sort of not get into all of them, but basically everybody here is trying to reassure the investor who doesn't want to give his money to the DRO. Sorry, to the company that the DRO is validating, the company that's looking for a million bucks.
Investor doesn't want to give it, right?
Investor is the one who is the supplier and the customer is the company.
So everybody's going to have to rack their brains, bend over backwards, figure out what bonuses, incentive structures, penalties...
If somebody takes a bribe, do they get completely ejected from society?
Do you only take people who throughout their entire lives have shown nothing but shining integrity and who are relatively well off and so don't need the bribe?
I mean, there's just so many ways that you can figure out ways to solve it.
And of course, if nobody wants to invest in the stock market, then so what?
It just means that economic growth slows a little bit.
It just means that entrepreneurs have to start putting up their own So what?
That's fine. If people don't find a good way to solve this, even if everything that I'm talking about is nonsense, and nobody finds any way to solve this problem, so what?
That just means that you have to eat what you kill as a business.
You have to grow, not through investment, but you have to grow organically.
Well, that's not the end of the world.
So what? I mean, it's absolutely up to people's choice.
Nobody has to invest whatsoever.
I'm absolutely positive that a million creative and positive ways can be figured out to solve these issues.
But even if they can't, so what?
Nobody still gets to take your money because the government, she is gone.
Thank you so much for the donations I got to today.
I really appreciate it. If you feel like kicking some shekels my way, I can't tell you how much I would appreciate it.
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