• Proof by Definition

  • $20,000 Open Challenge

  • Unofficial Rules and Guidelines

  • Summary

Proof by Definition

S.E.C. Definition: A Ponzi Scheme is an investment fraud that involves the payment of purported returns to existing investors from funds contributed by new investors.

TPF Proof: In practice, under foreseeable and non-hypothetical conditions, we can observe the following characteristics for non-dividend stocks.

  1. Stocks are investment instruments.
  2. Investors do not receive any money from the companies they own. The returns to existing investors—the realized capital gains—are strictly dependent on the funds contributed by new investors.
  3. Investors think the returns come from the underlying business [purported].

The characteristics of non-dividend stocks meet all three technical elements in the definition. The word fraud is a subjective opinion word, not technical. Therefore, non-dividend stocks meet the SEC’s definition of a Ponzi scheme.

Open Challenge: $20,000 Reward ($40,000 for Journalists)

A stock without dividends is a Ponzi asset. It’s not how equity instruments were designed to work historically and not how ownership instruments are supposed to work logically.

The challenge is to break the TPF proof by showing how non-dividend stocks from Google, Berkshire Hathaway and Tesla DO NOT meet the definition of a Ponzi scheme. $20,000 will be awarded to the first person who breaks the proof ($40,000 if that person is in journalism). THIS IS NOT A JOKE, AND IT IS AS STRAIGHTFORWARD AS IT SOUNDS. But if you think non-dividend stocks are legitimate ownership instruments, then it’s clear that you’ve never researched the history of stocks.

Take a moment and ask yourself if you know what a proof is with respect to math and logic? Do you know the difference between theorems and theories? Do you know what legal tender, the monetary base, or the M1 and M2 are? Or the difference between falsifiable and unfalsifiable ideas? It’s okay if you don’t. This challenge is meant to encourage research. But just be aware that the person you are challenging understands all those things and any textbook ideas that flashed through your mind when you first heard about this challenge.

The official rules will be available in October 2019, but the unofficial rules below are pretty much the same.

Unofficial Rules and Guidelines

Your challenge is to show why non-dividend stocks from companies like Google, Tesla, and Berkshire Hathaway do not meet the SEC’s definition of a Ponzi scheme. To be specific, you must show why the financial instruments GOOG, TSLA, and BRK do not meet the definition of a Ponzi scheme between January 2015 and December 2018. There is nothing special about this time period, but a reference period is necessary because the TPF proof is based on observable facts, not unforeseeable events. If Warren Buffett starts paying his shareholders in 2020, then BRK will no longer meet the definition of a Ponzi scheme. However, it is well documented that Berkshire didn’t pay dividends since 1967, which is an observable fact used in the proof.

It is important for contestants to understand the critical difference between hypothetical assumptions and observable facts. The TPF proof is based on the observable fact that Berkshire’s investors make money by taking money from other investors. It is illogical to use a hypothetical assumption like how Berkshire could start paying dividends in the unknown future to debate the observable fact that they do not pay their shareholders in practice. From my experience, this logic alone will debunk 99% of the arguments for why non-dividend stocks are ownership instruments. I will go over more examples below, but please pay careful attention to this: It is illogical to use hypothetical assumptions to debate observable facts. Hypothetical arguments are invalid because the Ponzi process is observable. Hypothetical arguments will be disqualified, and this alone will make most of you quit right now.

Your argument must be reasonable and must be focused on the Ponzi Factor—the fact that investors don’t receive money from the companies they own and the only way they can make money is by taking it from other investors. Your argument should be obvious and stronger than the TPF proof and it cannot be 50/50 (Please note that if you actually have a valid argument, it will naturally be stronger and better than 50/50). It cannot use silly reasoning, small technicalities, and ridiculous rationalization.


“All money gets circulated in the economy and therefore even dividends ultimately come from other investors, so dividends are Ponzi too!”

The argument is too broad. It doesn’t address the Ponzi Factor but tries to rationalize it by attacking dividends.

“A Ponzi scheme doesn’t exchange anything. Investors are exchanging an ownership instrument, and therefore, that’s not Ponzi.”

The exchange of synthetic instruments with no tangible or legitimate value is a minor technicality.

However, you can use this argument if you can show why GOOG, TSLA, and BRK are legitimate ownership instruments. But you need to be familiar with the facts that were elucidated in The Ponzi Factor, and explain why imaginary instruments with no monetary connections to business revenues have any legitimate value. The two key things from the book are that shareholders never receive any money from Google, Tesla or Berkshire, and stocks are not finite instruments. Stocks are imaginary paper companies can print at will. Imaginary paper is something and not completely nothing, but extremely close to nothing. So, feel free to show why the stocks from those three companies are legit ownership instruments, but don’t recite the textbook finance ideas that were already debunked in the book.

I’m an investor, and I know my profits come from other investors. Therefore, the purported element is broken.

This is actually a decent argument that uses a technicality to break the proof. However, it is generalizing personal knowledge and ignores the critical point in the proof—the Ponzi Factor—and how a Ponzi scheme is a system that shuffles money between investors.

The only way to break the proof is to show how investors can make money without taking money from other investors and without using hypothetical assumptions like how “Berkshire, Google, or Tesla could start paying dividends in the future.”

Other Things to Consider:

No Secondary Sources: You need to use primary sources such as SEC filings. If you use a company’s internal investment relations report, you need to make sure the information is accurate (Tesla is known for exaggerating reality). Do not use sources like Investopedia, Wikipedia, Bloomberg articles, etc. They have a lot of false information.

No Hypotheticals: You cannot use hypothetical arguments. Your argument must be based on observable and provable facts. Please note that most textbook ideas from finance are hypothetical and unprovable.

Do Not Generalize: You cannot generalize the actions of one company and assume others will follow. A common mistake is assuming Google will start paying dividends because Apple started paying dividends in 2012. The idea that Google could start paying dividends is a hypothetical assumption. The corporate actions of Google and Apple are independent and unrelated.

No Analogies: You cannot defend the value of stocks with false analogies (or any analogies). A common one is, “Buying and selling real estate is Ponzi too because that money comes from another investor.” First, stocks and real estate are fundamentally different. You do not need money from another person to realize the value of a house. Second, analogies cannot validate any arguments. If anything, it just shows something else might be similar. Analogies are typically used to rationalize what a person wants to see—it’s not a defense for an argument but the mind being defensive.

Universal Error: Asset value ≠ Real Money: An asset value is a cerebral idea that comes from the exchange of money and it is fundamentally different from the money that is being exchanged. The stock market value is measured by the market capitalization, and real money is measured by the money supply (Monetary base, M1, M2). The value of a stock is not backed by anyone whereas the US dollar is legal tender that is backed by the United States Government. This is also why companies issue stocks to get legal tender.

The universal error is another slicer that debunks almost all the textbook ideas people have about stock returns. It shows there is a fundamental difference between unrealized capital gains and dividends. One is an abstract idea and the other is real money. And investors invest because they want money.

You will have to reiterate the fact: $36 trillion of stock value = $0 in real money on the top and bottom of every page you submit. If your thesis is valid, this fact will not disturb it—truth does not conflict with truth. But if your idea is invalid, this fact will make your argument sound ridiculous, which is also why you won’t find it in other finance books.

Fallacy | Stocks are Equity Ownership Instruments: The reason why stocks are called equity ownership instruments comes from history. Before the 1900s, all stocks paid dividends, and there was a definitive profit-sharing agreement between the shareholders and the companies they owned. Capital gains was never meant to be the primary or only way for investors to get their money back. Stocks came into existence because of dividends, not capital gains.

Today, a share of Google (GOOG) can cost $1200, but Google states in writing; they don’t pay dividends, there are no voting rights, and the par value of GOOG is only $0.001. So, if you own a share of Google, you won’t receive any money from the business, you can’t vote, and Google is only obligated to pay you $0.001 for that $1200 share.

Fallacy | Companies Don’t Pay Investors Because They Reinvest Dividends: There are two things wrong with the idea that companies don’t pay dividends because they reinvest it in the business. First, the idea is irrelevant. A stock without dividends is a Ponzi asset. It doesn’t matter why a company doesn’t pay the shareholders. The problem is they are not paying them. If investors don’t receive any money from the companies they own, they are forced get it from other investors—Ponzi.

The second issue is that the idea is unprovable. You say, “Google is reinvesting dividends,” and I say, “They’re just greedy.” You don’t have to agree, but you can’t prove me wrong. And I can’t prove you wrong either. The “reinvesting dividends” idea is not factual. It’s an unprovable assumption and permanent excuse companies use to avoid paying shareholders indefinitely. Lastly, it’s important to keep in mind that that there are many innovative companies that pay shareholders and reinvest in the business (Apple, IBM, MCD, BMY, etc.).

Fallacy | Stock Buybacks Return Money to Investors: Unlike dividends, stock buybacks cannot be considered returns to investors because they can be rescinded with dilution. Many public companies print additional shares before or after the buyback. Some buybacks are also specifically designed to buy the shares from the directors and CEOs. The only way buybacks can be treated as returns is if the company definitively states it will never issue more share after the buyback, otherwise they can rescind what they returned.

Fallacy | Stocks are Backed by the Company: Companies do not back the value of their stocks. If they did, the shareholders would know exactly how much their stocks are backed by and when they will receive that money. In practice, we can clearly observe that if an investor buys a share of GOOG for $1100 and the price drops to $900, Google will not make up that $200 difference. The idea that stocks are backed by the underlying company is based on a hypothetical scenario of when shareholders might receive something if the company liquidates. It is hypothetical because no one knows if anything will be left over after liquidation, and no one knows if or when companies like Google, Berkshire or Tesla will liquidate.

Fallacy | Voting Rights Make Stocks Equity: First, stocks like Google’s class C shares (GOOG) do not have any voting rights. Second, voting only works when there is a finite number of votes. It is meaningless for stocks because companies can split shares, print additional shares, and do a lot of things to alter the number of votes and the voting structure. Stocks are not finite instruments (Tesla’s shares outstanding have almost doubled since 2010). They can be printed by almost anyone, which is also why they cannot be considered real property with intrinsic value. Third, voting has no economic value, which is evident in the narrow spread between Google’s voting A shares (GOOGL) and their non-voting C shares (GOOG). The difference in price is typically around 0.5%, which means investors believe the right to vote is only worth a 0.5% premium.

Lastly, there is nothing in history that shows voting as the essential element that made stocks equity. There is plenty of evidence that shows why dividends were essential to ownership, but not voting.

Fallacy | The Historical Return to Equities is Positive: The returns to equities are completely unknown. There is no database that tracks investor losses, and this is a highly debatable subject that is embedded in equity risk premium research.

The idea that equities have returned 7-10% annually over the past century is a myth that comes from misquoting the returns to the S&P 500. However, the performance of the S&P ignores over twenty thousand delisted companies from the overall market and thousands of companies that have been delisted from the S&P index itself. Contrary to what many assume, the performance of the S&P 500 is not made up of 500 stocks. It is made up of thousands of constituents, and the performance is based on the best 500 stocks (deemed by the S&P) on any given day. If a company on the S&P goes out of business today, it will simply be replaced with a new one tomorrow. Between 1968 and 2018, the S&P 500 circulated about 1600 companies. The long-run performance of 1100 companies are completely unaccounted for.


“When you attack someone’s opinion, they respond with facts. When you attack someone’s belief, they respond with emotion.” Chris Martensen

In short; you must show how Google, Berkshire and Tesla investors can make money without taking it from other investors and without using hypothetical assumptions about what those companies might do in the future. You need to use common sense, observable facts, and logic. You cannot use ridiculous rationalized ideas, which is common when personal beliefs are challenged.

Please watch this video, which covers many of the flawed arguments finance junkies use to debate the TPF proof—some of which are probably ideas you are thinking of right now. You should also look at the Logic and Lexicon page for more examples of false analogies and hypotheticals. You should understand the research from The Ponzi Factor and the financial fallacies that have been debunked. Don’t waste your time reciting textbook fallacies that have already been debunked.

The $20,000 reward is real ($40,000 for journalists), but I, Tan Liu, am only offering it because I know the proof can’t be broken. I’ve debated hundreds of finance academics and junkies and they are predictable. They think an imaginary asset value is the same thing as cash, and the only way they can defend the actions of non-dividend companies is by using hypothetical assumptions. They have opinions whereas I have a proof—a logical formula. They recite assumptions while I show observable and provable facts. I know what they are thinking at much deeper levels and it is insufficient to break the proof. Now, I am also giving everyone an incentive to prove me wrong. Good luck.

[The details about the submission process will be available in October.]