Central to our understanding of modern finance is the coexistence of three primary elements: valuations, returns, and distributions. Exposing the hoax of modern finance requires an unflinching and in-depth examination of these intertwined aspects.
The first component under scrutiny is valuations. Valuations in modern finance are often dictated by market assumptions and the expected revenues of a company. However, the evaluation process may present a distorted picture of a company’s true worth. Consider the example of tech startups, whose valuations often run into billions of dollars despite having no tangible assets or even an established income stream. The bases for such valuations can seem mystifying, if not outright delusional. They often rest on subjective factors such as market sentiment, perceived future growth, or even the so-called celebrity effect of the founding team. This paradoxical valuation methodology signals a skewed financial mechanism that deludes investors.
Moving on to returns, another scenario that exposes the fallacy of modern finance is the expectancy of high returns without commensurate risks. Eminent economist Eugene Fama’s Efficient Market Hypothesis suggests that it is impossible to beat the market consistently as market prices always incorporate and reflect all relevant information. In contrast, the widespread belief in ‘get rich quick’ schemes and lucrative day trading strategies challenges this hypothesis. Success stories of people making a fortune through quick trades often overshadow the majority who lose money. These practices reveal the skewed perception of risk in modern finance, where the allure of high returns often masks the impending risks involved.
Lastly, let’s delve into distributions, specifically dividends and share buybacks, another aspect that reflects the anomaly of modern finance. The traditional purpose of distributions is to return excess capital to shareholders. However, modern finance has weaponized distributions as a tool for financial engineering. Take share buybacks, for example, which corporations use to inflate earnings per share artificially and thereby boost their stock prices. Moreover, they are often financed through borrowed money, pushing companies into higher debt levels while masking the truth behind the so-called success.
In the case of dividends, the tale is no different. Many companies maintain or even increase dividend payments to project financial stability, even when their earnings are plummeting. This strategy can be detrimental in the long run as it erodes the company’s capital base, leaving it vulnerable in times of financial downturns.
In the midst of these paradoxes, one finds the man-made hoax that is modern finance. Valuations have become increasingly disconnected from underlying assets and earnings; unrealistic expectations of returns are perpetuated, hiding the intrinsic risks; while distributions are manipulated as mirages of success, concealing decaying financials.
Throughout this journey, it becomes clear that the financial world teeters on illusions skimmed over concrete economic realities. Therefore, the investor’s challenge lies in discerning the mirage from the oasis in this financial desert, thus avoiding the grand hoax that modern finance often is.
