We are back with Tan Liu, author of The Ponzi Factor, to discuss a few more topics that are vital for today’s investors. In the last episode with Tan Liu, we discussed Tan’s journey to writing The Ponzi Factor. Today, we get to go a little deeper into some aspects of the book that are important for all investors to be able to identify and understand. We will discuss the importance of knowing exactly where your money is, what the difference between investing and gambling is and a few more key points that will better equip you to invest your money wisely.
We are back with Tan Liu, author of The Ponzi Factor.
In the last episode we discussed Tan’s journey to writing The Ponzi Factor and how his time working for a hedge fund allowed him to see behind the curtain of the modern day stock market and into the unspoken truths that are often overlooked by today’s investors.
In today’s episode we get to go a little deeper into Tan’s book to discover some aspects that are absolutely vital for all investors to be able to identify and understand. We will discuss the importance of knowing exactly where your money is, what the difference between investing and gambling is and a few more key points that will better equip you with the knowledge necessary to invest your money wisely.
Key Takeaways:
Accounting tricks: How accounting practices can be chosen to skew the financial reports to show profit in “Big Business” (2:51)
How are stocks connected to cash-flow (10:07)
Public market vs. Private market, and what you need to know (11:48)
The archaic definition of Investing, and how it might be hurting you (12:44)
Why Tan believes that stocks should be defined and treated as gambling. Will you agree? (13:55)
Is Tan’s perspective simply a biased slant? (20:38)
Now that you have heard Tan Liu’s opinion on the current definition of an investment, do you think that more investors should know the outdated structure of their investments in the public market?
To go deeper into the inner workings of the market and arm yourself with an in-depth understanding of Ponzi Assets and more, grab your copy of Tan’s book The Ponzi Factor here: amazon.com/Ponzi-Factor-Simple-Investment-Profits
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- Initially the Ponzi Factor is about how I realize that in finance when you create these synthetic instruments whether it's a stock, that a company prints or in my case for the hedge fund, is a life settlements policy, which is essentially a life insurance policy. When we create these synthetic derivatives or synthetic assets, they're not really backed by anything and ultimately to pay out somebody, you gotta take out money from someone else.
- All right, this is a Solomon Investor Podcast I have with me a special guest. This is Tan Lui. Now, if you guys, have not heard the first episode with Tan, you've gotta go back and listen to it. He's breaking down some really key things that no one breaks down, there's always an elephant left in the room. And I can promise you this with your investments you don't want an elephant left the room. Tan, welcome to the show.
- Thanks for having me. Tan is the author of the Ponzi Factor and the book explains why today's non-dividend stocks meet the definition of a Ponzi scheme. Now this is really important it's a bold claim. He's broken down lots of pieces of the fallacies of it, lots of errors and why it's actually not collateralized, why it's not backed by anything and why your investments need to be backed by something. You have hard earned money and it needs to be collateralized. Tan has two different undergraduate degrees in economics and finance and a master's degree in statistics. He's worked in the finance industry 10 years. And during this time he's worked at two different hedge funds and had a career managing distress assets. I love people like Tan, because he's been behind the curtains. He's actually seeing both sides of it. He's not just hearing the rules of, you know, what a money manager might say. And typically, you know, most money managers haven't seen behind the curtains. They may be behind the curtains, but they're not looking behind the curtain. There are just, they're selling forward. So Tan, I'm so glad you're here, man. I've got lots of stuff I wanna continue to just dive in on. The last episode is chock full of just some really powerful nuggets. What I wanna chat with you on is, you know, I can sold lots of large companies. So obviously we have three dimensional investments in Boron Capital. We've got the Solomon Investor who actually comes in and invests into real estate, typically in a fixed rate return backed by the real estate. And then they set it and forget it. And they can compound, it's beautiful on both sides. I've had people, you know, 14 years investing with us and you know, some of them five and six and seven times our money. When I consult businesses, I reviewed financials from companies that appear to be doing very well. You know, tell my listeners how in the market in big business, how accounting practices can be chosen to skew the reports of the financials.
- Yeah, so essentially I talk about this in chapter one of my book. In fact, this was actually the thing that really led me to see that finance, is not a game where the "intelligent" or the "lucky" necessarily are successful. But the people who know how to account for profits are also very successful in the sense that it has nothing to do with intelligence is simply has to do with accounting tricks. Initially the Ponzi Factor is about how I realized that in finance, when you create these synthetic instruments, whether it's stock that a company prints or in my case for the hedge fund is a life settlements policy, which is essentially a life insurance policy. But when you create these synthetic derivatives, or synthetic assets, they're not really backed by anything and ultimately to pay out somebody, you gotta take out money from someone else. Because if you have something tangible that you actually have an N user, somebody who buys a house actually wants to live in the house, they won't actually want more money back until maybe later on, until they are enjoying the house, financial on the other hand is different. You create a life insurance policy that you wanna trade. Well, if you wanna make a dollar, you gotta take it from someone else, same with stocks. If you wanna make a dollar, you got to take it from someone else, from non-dividend stocks because if the company never pays you dividends and you receive nothing from the company. So the accrual accounting aspect of what I described in chapter one in the hedge fund was I worked for a fund that gave out premium finance loans. They assumed that they could essentially fund these policies that would cost, let's say $500,000 for the first two years and sell it for a million dollars come year two. So the problem is this. They can record profits from day one as if they're gonna collect the $1 million in sales in two years, but from month number one, up to 24. However, the problem there is how do you know you're gonna actually sell it for a million dollars in two years. The practice is called accrual accounting. So therefore they were actually just recording these accrual profits, phantom profits based on assumptions that they made about how much the policy is actually worth in two years rather than--
- Can I ask you a question? You are telling me that they don't have to make a profit to actually report a profit?
- Correct. Correct. That is exactly what I'm telling you. Yeah, they basically buy for five assume, they're gonna sell for six and start recording profits as if they're gonna sell for six, but they never actually sold for six.
- So you get a statement that actually shows I have more value. The company hasn't even proved the revenue it's completely speculative, and it has nothing to do with truth of actually the real tangible value of the actual currency.
- Yeah, because there was no value. It's a life insurance policy, right. Is there some kind of like financial speculative value under the line itself, yeah. But you know what happens when you stop paying the premiums on a life insurance policy? Disappears, thin air, nothing, nothing. What happened when people stopped paying their mortgages? Well, there's still a house, okay. There's still a house that didn't disappear, okay. They had some problems, sure. The ownership may have changed a couple of times but the house is there. When you don't pay, when you can't sell your stock when you have zero, you can't sell your house, we got a house. So there's a real difference there. So yeah, they were basically accruing profits that they never made, and based on speculative things. And how do they get the so called "price" of million dollars or let's just keep it simple, buy for five sell for six, how do they know it's six. They don't know it's six it's based on their own projections, based on their own models. The thing that makes this possible, really it has to be an esoteric asset, like a life insurance policy that no one really understands how it's traded or anything like that or life settlement market, I guarantee you most of your listeners, not all of them have never heard of what I just said, right, no one understands. So one the asset has to be really exotic in terms of no one really understands. Two it's also very illiquid, meaning it doesn't sell very often. So there's really no way to gauge how much it's actually worth. So therefore you can kind of get away with this accrual accounting thing that by recording whatever the heck you want.
- Which ironically then, so it's illiquid, it's abstract, it is a accrual accounting so it's speculative, it's something we're basing you know--
- Future assumptions,
- Assumption, earnings and then you can't really, you can't actually take out money. You can't actually I guess get those funds because they're illiquid. So it's, all, it's very cyberry but in the book you share how, when the company is doing this and people are buying in on speculation, the higher the stock goes up, even though for Bob, the investor, it's his money is not having any reflection or correlation, to the actual stock. The company actually benefits, they can borrow more money against that, right?
- So two things about that. One let's dissect that. One the accrual counting thing is different from the stock market. The accrual accounting thing was specifically with those esoteric assets thing that they can speculate. But basically that was just show you don't have to always make money and bet the right way to show "a profit" as you said. Again, one of the things that makes that possible is illiquid in terms of no one actually knows how much those policies actually work. So you just model whatever the heck you want and that's just make that assumption. Now the stock market is a little different in the sense that at least it's liquid enough and there's enough transactions going on for people to record the actual price every day. So you can't just assume something it's gonna be worth $20, when today it traded for 10 or something, you actually have to record the 10. But indeed the non-dividend stocks aspect that you just mentioned, it has nothing to do with a company in the sense that it has no monetary connection with the company. It has no legal, it has a legal connection, but not a legitimate legal connection. There's no logical connection. Because the company never actually pays you. This is why you have these stocks like Tesla who has lost $6.8 billion over the past 10 years with stocks at rocketed from 20 to $800. Not just saying, I knock on Tesla, I know there's crazy hardcore fans out there. Let's just show that the stock is not connected with the cashflow of the company. Is not connected with the fundamentals of the company and it's not just a Tesla at one off example, there's a bunch of other examples as well, Way Day, Shopify. Most of them are techs savvy and also Blue and like in some other medical stocks sometimes. But the point is you have these situations where the stock price increases many falls without any reason while the company loses tons and tons of money. Well, it can only happen in one scenario. If the money that people are getting from buying, and selling stock never comes from the company because they're not making any money how could they be paying them. It comes from other investors, which is essentially how Ponzi scheme works. You're just shuffling money between investors.
- Right you know, the more you talk about this, it really breaks down the picture of what we call the private market versus the public markets. As a Solomon Investor the a whole mentality is you gotta move from the public market. You gotta remove, yourself if you want to actually have tangibles, you gotta go into the private market and the public market is the central market. It's basic bathtub with tons of things, we call them stocks. And you actually, feel like you're diversified in that big bathtub. It's just one big bathtub, it's a centralized location. And so the private market actually is where the private assets are, where it's like it's backed by collateral is backed by something tangible. You know, you share in chapter three, the idea of investing, investing versus gambling. Tell me more about that.
- What I basically explained is one the idea behind investing and gambling has been improperly defined right now. There is no proper definitions for it it's basically archaic definitions. When you look at gambling has to do with just playing game at casino, that's the way they describe it. When you look up investing it's about buying an asset, buying the thing and selling it for more. Now the problem there is the word investing and the definition that it came from that's attached to it, it was developed the 1600s when the assets people were buying were real estate, land. It was not this imaginary, Ponzi assets, non-dividend stocks that companies just print at will. So the asset they're actually talking about when the definition was made was actually tangible stuff. It was not, they did not imagine today where these imaginary assets, these Ponzi assets exist and people they're not backed by anything people keeps trading them.
- Right.
- So the thing is, I point out that these definitions are archaic and a lot of times we just simply, don't actually know what investing and gambling really is, how do we define it. And I propose basically a probabilistic definition I said, if a scenario is a greater than 50, 50, the probability of success is defined, is defined and you know it's better than 50, 50 then that is investing. Gambling I define it as if you know the probabilities and it is less than 50, 50 or 50, 50 that's gambling. Or you don't know what the probability is at all, okay. And basically that's considered gambling. The problem with stocks and all that stuff you don't know, what the probability at all you can make guesses and stuff. Do they have models to make it look like, you know, the probability? Absolutely, but it's not the real probability. And what I pointed out is in casinos, if you play roulette or blackjack or any other games, you can actually calculate the definitive probability of the ball landing on black or red, why? Because there's only, I think 38, yeah, 38 it's been a while since I looked at that wheel. 38 numbers and you know, there's two that are green and the rest are so you can calculate the definitive probability there. When it comes to stocks, there is no amount of factor. You can't encompass all the factors because those factors are also just appearing, appearing whatever it is, because it has nothing to do with those facts. It's about exchanging money between investors. So when it comes to stocks, by definition, it should be gambling and it should be treated as gambling more importantly. It's not just about, oh everyone knows it's gambling. I've heard tons of people say, but everyone knows it's gambling, everyone knows it's gambling well, why don't we treat it like gambling. As in, why don't we make it that the exchanges, you know, the brokerages cannot open accounts for people who are 18, 19 and 20, make it 21, right? Why don't we just attach a word gambling to all these investment firms and on the paper, rather than saying, you know, someone like Ross Stein Investing, right. Let's just, let's just say Ross Stein gambling. Oh man, or Alliance Bernstein investing Alliance Bernstein Gambling, right so yeah.
- But really, I mean, if you were actually just call it what it is and the reason why we don't do that, right, it's 'cause we have a connotation towards gambling and we have a connotation toward investing and we wanna tie the investing connotation on that public market.
- Yeah because they'd all be out of business if they attach the word gambling with their documents.
- It's true because you know, let's just say Jane is 71 and you know, Fred is 59 and they're wanting something tangible that they can count on because the truth is, is they've worked their tail off their entire life we call it the 50, 50, 50, you know. It's 50 hours a week for 50 weeks a year, for 50 years. And now they're coming to the point of, I gotta have something, I can't work forever. I gotta actually have tangible, you know, money I can count on. It's time now that I can have a nest egg built up, that's actually gonna, you know, produce money for me. And that's why the private market. You know, we talk about it is so powerful because when it's backed by a tangible, like real estate and in Boron Capital, we do is that it's 3D investments. So it's three dimensional, it's actually backed with no we it's directed by God or where we go to invest in it. It's land and it's a real estate business inside and the cash flows. So I love in chapter three how you break down that very clear what the two differences is investing and gambling and you just call it what it is. I love man, you know, you guys you gotta get the book, the Ponzi Factor, because you've gotta actually know what you're talking about. You can't just leave this to a money manager. You can't just put this on the back burner. You gotta know what you're investing in. You've gotta have direct understanding of you don't have to go be the operator and do what we do, but you gotta know where your money is. You gotta have confidence, you gotta have control that you've actually put it somewhere that has collateral.
- Yeah, and I will mention though, one thing with the definition that I'm glad you pointed that is actually is one of the conditions for that definition, is that it doesn't involve something with collateral that's the definition. Meaning if it does have a collateral, it basically, it's not a part of gambling aspect of it. So therefore to what you said, it needs to have collateral, right.
- Love that, love that. And so, you know, in a difference to what you were saying earlier, and that difference between the public market and the private market is the public market is speculations built on the emotion, it's not even tied to the companies. And then the private market, there is no speculation. It is what it is, if it produce. It may not be good real estate 'cause it's not producing, but it is the tangible real estate. You know, with what we do as a Solomon Investor, as we come in with a mindset that one, we don't lose money. And two, you gotta calculate, you know, and be in something that's collateral that you're talking about. And then three, it needs the cashflow. It needs actually produce cash because in today's market, in the unprecedented market, we're in, you've gotta actually see the wheel, the velocity of the dollar's that keep turning. You gotta get a quarterly return, you gotta pull money off the table. You gotta be touch on a regular basis. And it can't just be in a statement.
- Yeah, exactly. Yeah, the cash. There is a big difference between cash and imaginary value.
- That's what it is. Okay so you, really hit well on you know, false dividends, buy backs in the first episode. So guys, if you guys haven't listened to the first episode, you've got to go back and listen to it. Tan breaks down some really key points, no matter how long you've been in the stock market. I even have money managers come to me and say, man, what Tan's teaching is so educational for my own conscience, I guess really good stuff for my own conscience. I have to think through, you know, how I'm gonna actually be a money manager in the stock market. So, you know, listen this is good stuff this is me. You gotta chew on, you gotta know your stuff. And the book is really gonna help you with that. One more question I wanna ask you is, you know, I just lost, I'm now I'm Todd and I've been, you know, in the market for 20 years, and I've seen the ups and I've seen the downs and you know, I've seen the market do well. And I've seen the market actually have some big, hard falls and I want you to just use one of my investors examples, who's in real estate with us, but he had about 7 million in the market. And he was seeing, you know, a gradual, you know, rise since 2011. And he actually lost all of his actual return in this last, you know, crash in 2020. And so the rule, in his head is this, I gotta keep my money in, because I gotta hope it's gonna come back. I gotta know it's, I should probably double down and throw more money in. But he also has this hard conviction internally like I can't lose anymore. I want to be older, you know, have money that I can count on. So, you know, you run into that all the time with this situation. Cause obviously we just expose how it works. It's built on speculation. What would you tell Todd in that situation if he's like, but I have to have the money. It's just not a game, I can't gamble. I can't play the game, but it will come back, right. It's always gonna, I can just leave it in there forever, and it's always gonna do well, right.
- Look I'm not, I wouldn't tell Todd anything as my role and my own goal for the book is to explain how it works and let them make their own decisions. I simply like, yeah, he's in a rough situation. A lot of times people are ask for solutions about investing and stuff. It's like dude I'm the doctor that told you about cancer. Now you want the cure, okay. Come on, give me a break, right. But that's a tough situation. And yeah, my goal is to really explain what stocks are, how they work. Listen, for all I know and based on what we can see, and we experience right now from the Feds and the SEC, and the fact that money is being printed and dumped into it, he may not be bad off if he leaves it in for now because like systems are officially propping it up, right. But we're not talking about basic logic or anything like that. We're talking about literally an artificial system, right now, which sucks. And to be honest, when I wrote the book, I did not anticipate the so called "dirty cops" coming in and doing what they're doing. But yeah, it's just pretty normal stuff, but no, there wasn't dirty cops were involved it's a little different. But at the end of the day, he should understand exactly how stocks work. It's not backed by anything and tomorrow it could disappear, and that's just the end of it.
- Right, it was kind of a trick question. I appreciate your answer, you did well with. What I wanted to show my listeners is that you were, you were truly unbiased to the market. And you're statistically showing an optic and metrically showing how it works, how it has fallacies, how everyone is taught, trained, educated, that's backed by the company and then it's actually not. And so, you know, I laid that on a silver platter for you to be biased and you weren't bias. And I love that because you're just showing what the situation is. And so with that is you know, guys, you've got to actually, you've got to know the education because when it's being presented, like this is an unbiased, you know, results the unbiased result. He's shining a light on the investment world and you've got to actually invest in investments. And what he talks about in chapter three is so important, that there is a difference in the public market gambling and a private market investing, which is really, really important. And that's what we do as a Solomon Investor, we help you activate your net worth because as Tan just said, it's what we call net worthless, if it's a value on a statement. Until it's actually turned back into the actual currency that we still "believe in", until it's turned back into that, you know, it's not counting for really anything. And so if you were one of those who you actually want it to count, you need it to be tied to something certain you need some collateral. You need to be able to look at your quarterly returns and see money coming in and not losing principal. Then you gotta be in a three dimensional investment. Man, I love talking to you, Tan. You're a wealth full of knowledge, you've got so much depth. You love exploiting things that aren't good and you got nothing against the stock market. What I love about you is you got nothing against anybody. You just want justice, you just want truth.
- Yeah, I will say I'm against the finance academics. Cause I think there are a bunch of charlatans who shouldn't be working. But I'm against them, but yeah at the end of the day I don't care what necessarily people do. I mean some of my biggest fans are still options traders and they trade derivatives and basically, yeah they just simply know how it works. They know it's ponziness they know what's going on they know this thing called "valuation doesn't work". And it's all coming from people exchanging money, but you know, they do what they do, right. I got nothing against that, I just want people to know the truth of how the stock market works that's my only goal.
- I love that guys has been so good. We'll have Tan on again. This is again, episode number two with Tan and so go back to episode number one, he breaks down the definition of Ponzi schemes he breaks down why a non-dividend stock is that. And so you just gotta know where your investments are. You gotta to know how much you got, you gotta know where it is, you gotta know how much you're making and you gotta know it is it backed by collateral. And if it's not, we would say, as a Solomon Investor, you got to activate it. You gotta put it into something that's tangible, something that's collateralized. You gotta protect it, take it away from the speculation stuff and actually put that money where Tan, thank you so much for your time, my friend.
- You are welcome.
- It has been a joy, if they wanna if my listeners wanna reach out to you, they wanna get the book and educate themselves, where can they find you?
- The book is available on Amazon. It's on audible as well, the audio book, and they go find me on the Ponzifactor.com. And also, as I mentioned to you, there's a PDF copy out there, floating around. I think my Instagram page, you may even have the link. Cause ultimately, like I said, I want to share the truth as in, is the book for sale on Amazon? Yeah, because it's a distribution channel. But if people who don't wanna spend the money, I'll give it to you for free, just take it and share because ultimately that's what I care about sharing the truth, that's it
- Love that, I love that. Tan Lui, the Ponzi Factor again, guys he's got a degree, undergraduate degree, in economics and finance and a master's degree in statistics. He's unbiased and the truth and just want you to know it. So I appreciate the time Tan it's been great. This is a Solomon Investor Podcast. We'll see you again.