Bernie Madoff the Economy and how the Stock Market Works
Sorry for the two day non posting, but some things went down that I had to rectify.
Mainly my computer breaking.
But that’s fixed now and back to writing.
Now, I want to make something clear.
I am not an economist.
Never have been and never will be, but I do consider myself a logical person and someone who is very analytical.
For example, I wanted to microwave a burrito tonight so I read the directions on how to do it.
The wrapper said to take it out of the plastic and wrap it in a paper towel, microwave for 2 minutes then turn it over and microwave for another 2 minutes.
Logic would dictate that the burrito would defrost and then emit moisture the wetting the paper towel and logic would follow that the towel would then stick to the burrito and then harden when it cools down, making me essentially eat a burrito wrapped in paper.
But anyway, that’s how my mind works.
I like to pick things apart.
Since I was without a computer, I got to thinking a lot.
This whole Bernie Madoff thing, I don’t get it.
Not that I don’t understand the scam, I do.
I remember back in high school, I sold lottery tickets for 6 free CD’s for a dollar a piece.
I collected a few hundred dollars and gave the winner 6 free Cd’s.
Know how I did it?
I signed up for Columbia House and just gave them the free Cd’s that I got as the promo.
Now, there was nothing illegal about that, and I definitely fulfilled my promise to the people who paid me the dollar, but essentially I was using one person to pay the other with no risk to me and pure profit.
Anyway, it’s 2008 and no one buys CD’s anymore, but my point is that I understand where the fantasy of easy money comes from.
Everyone wants it, and people would pay for it.
This is where salesmanship comes in.
Let’s say back in 1993 I started a consulting company, where I went around he country charging high school kids 50 bucks and told them I could guarantee them 300 dollars of Free money if they followed my advice.
If I had gone to 4,000 high schools I would have made $200,000, simply by telling high school kids how to raffle off 6 free CD’s at a dollar a piece with no cost to them.
Then, I could have taken that 200,000 and made an infomercial telling people how I became rich working only 30 minutes a day, and turned that 200,000 into maybe a few million.
All perfectly legal, legit and ethical.
Are you freaking kidding me?
I could be a g-d damn millionaire by now?
Now I am pissed, and this isn’t an act.
I just realized that I had the perfect idea back in 93 and was an idiot for not following up.
But anyway, back to my point.
That was legal.
Bernie Madoff wasn’t.
Here is where I am confused.
Stocks used to make sense.
There was a company that needed money.
They raised money by selling stock in the company, and they rewarded their investors with dividends and growth.
If I had invested in a steel company, I was basically letting them use my money so they can make more money.
Let’s say that I bought ten percent of company x in 1990.
That company when I bought it was worth one million dollars.
That means I owned 100,000 worth of stock.
If I was going to sell that stock in 2008 and the company had grown to be worth two million dollars I now held the same 10 percent that is now worth 200,000 dollars.
That is how stock should work.
What happens now, is that I buy stock in company x for 10 dollars a share.
I buy 10,000 shares and for 100,000 worth of stock which is worth 10 percent of the company.
Someone else thinks that because I bought the stock that company x is a good investment.
They try and buy the stock, but there is no more to sell.
So, they come to me and tell me that they will pay me 15 dollars a share for my paper.
I sell it to them, making 5 dollar profit.
Everyone is happy right?
See, I come home after making a 50% return on my money in less then a week and buy my girlfriend a new mink coat.
She goes out for coffee with her friends, and they are all like, where did you get that coat?”
She’s like, “David Bought it for me!”
Her friends say, “You mean David he Fat Jewish Guy? How the hell can he afford a mink coat like that?”
So, my girlfriend will just smile and not say anything.
Her friends keep pushing her, and finally she tells them that I bough this stock and that someone bought it from me giving me 50 grand for doing nothing.
Her friends are impressed and are starting to think that maybe just maybe she made the right choice when she picked me over Johnny the quarterback of the football team.
They eat their dessert, talk about sex and purses for a bit and then go home.
When my girlfriend gets home she takes off her coat and calls me into the bedroom for a few minutes of amazing sex as a thank you for making her the envy of her social circle.
But, when her friends get home, instead of sex, they tell their boyfriends that they should be more like me.
Later that night, when we are at the bar shooting pool and taking body shots off Tracy, the high school bimbo who never made it out of our small town, they ask me what that stock was.
I’m all like, “guys, come on I can’t tell you.”
That’s when my boy Freddy, pulls me over.
Picture this, his white collar shirt is wet from the sweat stains and he smells like whiskey and beer.
He puts his arm around me and starts crying that because of his daughter’s learning disability his marriage is stressed and he hasn’t gotten laid in a while.
I feel bad for Freddy, I mean he’s been my friend for ever.
So, I tell him the company name.
He says thanks, then pats me on the back and stumbles into the rest room.
The next day, Freddy calls his broker and tells him to buy stock in company x.
The broker tells him sure, but after some research he calls him back and says that company X is now going for 20 bucks a share.
Freddy buys the stock, pouring all of his money into it.
He goes home, kisses his wife, eats dinner and goes to sleep.
But see, I have this friend named Ed.
Ed, hears about all this and wants in on it.
So, he calls me asking me how I made my money and I tell him about the stock.
Ed goes to buy some and now the price of the company went up to 30 bucks a share.
Freddy sells his stock and can now care for his daughter.
But then, my girlfriend comes up to me and says, “baby, Suzy (Freddy’s wife) got a new car, I want a new car.”
So, since I love her a lot, I go out and buy the same stock that I bought just last week that I thought was worth 10 bucks a share for 50 dollars a share.
Mind you, this whole time that company has not done one thing that makes it worth 5 million dollars.
They are still only worth a million.
Anyway, you are expecting me to say that I lost my money and that is the moral of the story.
But no, that didn’t happen.
I bought that stock for 50 a share and then sold it a few days later for 70 a share.
Got my girlfriend a car, had amazing sex again, (in a place I never thought she would let me) and proposed.
We moved to a bigger house, got married and had kids.
What happened to the company?
Well, the owner of the steel mill, who had retained a 51 percent ownership stake as part of the deal to go public, now realized that he was sitting on not 510,000 dollars, but with the stock trading at 100 bucks a share, he sell his stake for 50 million dollars to an even bigger steel company who thought it was a good investment.
Everyone was happy, until one day someone realized that they paid 50 million dollars for a company that was only worth one million dollars in the first place.
See, like I said, I am no economist.
I’m just some Joe Shmo.
Just seems to me that the whole stock market is one big ponzi scheme.
he only people who make money are the investment bankers and the people who buy and sell on the way up.
There is no skill for this, no “research,” it’s all gambling.
In fact, in retrospect, my lottery for 6 free CD’s was probably the most legit business ever invented.
Everyone wins, everyone is happy and everyone makes money.
Well, that’s my take on all of this.
By the way, I have another great idea that I think can make a million dollars.
How about a wrapper for a burrito that will allow me to microwave it without getting paper stuck in my mouth?
Want to invest?