Marilyn Vos Savant is an extremely brilliant woman who writes answers to questions in the Sunday Parade magazine. This past Sunday, I think she flubbed one, badly. Take a look…
My wife and I have lost more than a third of our life savings in the stock we set aside for our retirement. How can our hard-earned dollars given to a company for a share of stock just disappear? Where is the money now?
—Herm Voss, Shasta Lake, Calif.
Surprise—the money doesn’t go to the company at all.
Except for initial public offerings and certain later stock issuances (neither of which are on the open market at first and account for only a small fraction of purchases anyway), the company gets nothing. You buy stock from other investors. They get your money.
So far, so good. Marilyn clears up the "investing in a company when you buy stock" part. It's simply fiction.
When a growing number of people buy stocks—and from one another, remember—prices are driven up because buyers outnumber sellers. And as brokerage statements indicate the last selling price of the stock, investor portfolios become inflated.
Yes, more buyers than sellers of a stock results in auctioning the price of the stock higher. Good up to this point….but then, Marilyn misses it…
The economy can get into big trouble this way. You can’t buy the same stock back and forth numerous times, inflating its price, and think that you’re creating real dollars. Yet that’s just how many investors behave.
When you receive your stock statement with it's "inflated" portfolio value, Marilyn says the stock isn't really worth that stated amount. She asserts that "real dollars" have not been created. I beg to differ.
If I buy 100 shares of Goodyear stock the 15th of the month….get my monthly statement on the 20th saying that Goodyear stock is worth $1 more per share than I bought it for…..and then sell the stock on the 21st for 75 cents a share more than I paid on the 15th…..THAT'S REAL MONEY, not created money.
Marilyn goes on to compound her mistake…
To illustrate, say that 10 million investors each own 100 shares of stock in a company. Then I pay $1 more than the last fellow for a share. As a result, the stock price goes up by $1, and all 10 million shareholders see their portfolios rise by $100. But did I create $1 billion of wealth, the total of that increase? Of course not.
At the close of the day Marilyn is referring to, hypothetically, you're darn tootin' $1 billion of wealth has been created. The additional wealth empirically appeared in the form of higher prices buyers were willing to pay for the stock. Banks, brokerages, and insurance companies consider that "inflated" stock value as real money, real wealth. They will loan more based on higher stock value collateralization. It's real wealth.
But then Marilyn kind of embarasses herself….
This apparent $1 billion was generated by what I call the “Cheshire multiple” (after the disappearing cat in Lewis Carroll’s Alice’s Adventures in Wonderland). It exists mostly in the imagination.
Only a small percentage of investors can sell their shares at the price on their brokerage statements. As soon as sellers outnumber buyers, the price will fall and portfolios will shrink due to that same multiple. It works both ways. So most of this so-called money simply vanishes. No one gets it.
If "a small percentage of investors can sell their shares" at the price on their statement….."so-called money" isn't simply "vanishing"…..some stock sellers are putting it into their pockets. The profit placed into the accounts of sellers doesn't "exist mostly in the imagination", it's really there.
What Marilyn doesn't get is that the stock market is a zero sum game. For every winner there is an equal but opposite loser. Read any material from any knowledgable source on the market and you'll find that this is common knowledge.
When a third of your portfolio value has disappeared, sellers who purchased the same stocks you did, only at a much lower price than you originally paid….are selling and "taking" that difference in price and putting it into their accounts.
One last elementary example. At 10 AM, I purchase 100 shares of GE stock at $10 a share. At 3 PM, I sell my 100 GE shares for $10.50 a share. I produce $50 of wealth for myself. Where did that $50 come from? Was in just "so-called" wealth, was it just imaginary?
From the second I bought 100 GE shares at 10 AM, other buyers bought GE stock and they were willing to pay a bit more than me. That pattern continues all morning and into the afternoon. By 3 PM the new buyers who bought AFTER me, have driven the price to $10.50. I sell my shares and make a profit. That profit, that wealth, comes from the difference in price new buyers were willing to pay after I made my purchase. The new, higher price new buyers were willing to pay was paid with real money.
There's nothing imaginary about it.
This goes on every business day. Wealth changes hands zeroing itself out every day. For every winner there is a loser. Translate that dynamic into a monthly statement which reflects 20 such business days activity and you simply have a collective number which reflects the transfer of wealth from accounts to accounts. Real wealth that the winners don't, in the least, regard as "imaginary".
When your 401K or IRA used to be worth $10,000 and now is only worth $5000…..that lost $5000 that used to be part of your personal wealth wound up in the accounts of others who now own the $5000 of wealth that used to be yours.
The stock market is a 5 day per week, public auction Ponzi scheme which continually transfers real wealth from one person to another.
Marilyn, at whose feet I am not worthy to kneel, got this one wrong.
{ 13 comments… read them below or add one }
Stocks only have value when you buy or sell them. What your account statement tells you is what you could have sold the stocks for on the date the statement was prepared. It has no meaning other than that. You only make or lose money on stocks when you sell them.
Nope.
If stocks have no value unless you are buying or selling them….why do banks consider them to be assets?
Rev a simple explanation of a complicated ordeal. It's the same way libs explain Obama's healthcare, what you know or think you know is the way it is, who needs all of that other gobblily goop in the middle, that just gets in the way. There is alot more that happens when you buy a stock? Where do the quarterly or yearly earnings checks come from?
The big problem is that people don't take the time to learn the stock market and how it works. They blindly give their money to a person that they have never met that calls himself a "broker". The name itself should scare you. Would you give your money to the neighbor kid and tell him to go spend it for you and bring you the profit. I never will understand that. It's not that there is something wrong with the markets they do exactly what they should, there is something wrong with the people that trust people with their life savings and know absolutley nothing about the business. Your logic with your explanation is like telling someone to go buy some pork chops and lettuce then sell them and poof you are in the restaurant business. It doesn't make sense. What's the old saying…. "buyer beware".
One other thing, our economic problems aren't caused by business or the markets etc, it is caused by govt spending and over regulation. They control it, they caused it. Until you and the others on here accept that, you are speaking blindly.
Today, Great Brittain had a big meeting because their nat'l deficit reach $25B, yes Billion. Our govt continues to spend money like drunk sailors and will have us tens of trillions in debt by the end of this presidency. Don't worry about that either because our currency will collapse and we will go into a severe depression before that happens.
We simply disagree on this…
"One other thing, our economic problems aren't caused by business or the markets etc, it is caused by govt spending and over regulation."
Just the opposite of what you say here created the fiancial meltdown we're in right now. Free market….wildly free market efforts led directly to the bank collapses. Lack of government regulation paved the way for the collapse.
The same was true in the Savings and Loan scandal, Dot.com collapse, Enron explosion, $4 gasoline and now the free market banks.
Simple question: When do you pay taxes on the stocks you own? Every year according to the increase, or decrease in their "value" or when you sell them? As for the banks, perhaps that is why they are in such trouble now.
Only when the stock assets are sold…..just like with any other capital gains.
Just like with your house…..stocks can be used as collateral, making them officially an asset.
AIG and it's gambling partner banksters played a gambling game in which AIG sold many more times their ability to pay off. Goldman and others took full advantage of credit default swaps…..that's why a good chunk of AIG's bailout tax money went to Goldman. Greed and recklessness gone wild in the very free market.
Rev,
If stocks are a zero sum game, as you claim, and for every winner there is a loser, as you claim, then wouldn't Marilyn be correct when she says no real wealth is created ? There are just winners and losers evening each other out.
(Not that I believe that, but it seems you do).
Because he is wrong King.
No, I'm not. Wrong..that is.
Marilyn said that the wealth was imaginary…and it simply vanishes from your monthly statement. That is untrue. The wealth is transferred to other accounts….not imaginary at all.
This sentence….
"Only a small percentage of investors can sell their shares at the price on their brokerage statements."
….is contradictory to her overall explanation.
And this….
"So most of this so-called money simply vanishes. No one gets it."
…is simply misguided and, dare I say, ignorant. In a zero sum game someone always gets the "so-called money."
I bet Marilyn, because she is a righteous woman, will write about the many objections she received to that column.
I don't think you got what I was really asking. If the stock market is a zero sum game, as you claim, then for every dollar made, another dollar is lost. No net wealth is created, because one person's gain is another's loss. You've tried to tell me that before.
I really have an objection to the "zero sum game" part. That's the part that isn't right. I submit as evidence – the Dow Jones Industrial Average.
Let's use the Reagan years as an example, because I know you're a fan of his.
On january 1, 1981, the DOW was 972.
On january 1, 1989, the DOW was 2,168, 223% higher.
That sure doesn't sound like a zero sum game to me. It sounds like a LOT of wealth was created.
Wealth creation is not a concept that lefties like Reverend can wrap their minds around, King. In their world, there is an unlimited supply of wealth and it all belongs to the government. It's all simply a matter of distribution.
Well, hell, larry, of course liberals can't wrap their minds around wealth creation. Liberals have been watching the f*king conservative experts do it…and I must say…..I sure as hell can't wrap my mind around the concept of taking all the working class money and giving it to the richest 5%. But then, I'm not a conservative.
The market moves wealth around. The object of the game is to accumulate as much wealth from others as you can. That is done best through manipulating the market, (as Jim Cramer confessed to doing), hedge fund shorting (that's where a lot of the wealth "vanishes" to), insider infromation, mutual funds where no one even knows what the hell they're "invested" in, brokerage fees, paper shuffling fees, interest on the money borrowed to gamble with…..and largest of all, creating a perception bubble so a killing can be made shorting the whole shabang. We've witnessed that dynamic a couple of times.
It's a house of cards and mirrors.
Indexes don't tell you anything. Are inflation and the worth of the dollar factored in to those 1980's numbers? No. They're simply arbitrary index numbers that don't tell you anything.
The value of a stock has nothing to do with whether the company whose name is listed in your account created wealth or not. Other than dividends, there is no wealth correlation between stocks and the company whose name is printed on them. Perception of wealth, maybe, but not wealth.
What I said was that stocks are considered assets by banks.
Stocks are just casino chips in an auction poker Ponzi game. And you know how gambling goes….zero sum game. For each winner there is a loser.
Once again….the money that people claim as a profit (wealth) on their stock sales was created by the higher prices othere were willing to pay for the same stock you bought more cheaply. That ain't wealth creation…that's taking other people's money…..legally and all.