Sorry!! The article you are trying to read is not available now.
Thank you very much;
you're only a step away from
downloading your reports.

Where'd the Money Go?

By

It simply disappeared...

PrintPRINT
I had another "oh man" moment yesterday morning watching financial TV. One of the anchors, asking a sell-side strategist about the latest decline across all asset classes and all geographies asked (I am paraphrasing):

'Given the declines in all sorts of different markets - stocks, commodities, energy - and that these declines are taking place in all geographies, what I am most curious about is, well, if investors are selling these investments, where's all that money going from the sale?'

This is a classic: the belief that when a stock goes from $50 to $40, the people who sold it from $50 to $40 now are flush with enough cash that its availability must have a positive impact on another security somewhere else.

Let's say you, I, and 98 of our friends invested in a company XYZ that had 100 shares outstanding and its price was $10: so 100 investors, 100 shares, and yesterday's closing price was $10. But today I decided to sell the stock because I needed the money for bread, or for mortgage payments, or for a Weber grill. And you, knowing I am a motivated seller, are willing to buy that one share from me. We haggle, go through the price discovery process and we both decide that a trade goes through at $8, a 20% decline from yesterday (I am apparently very motivated and you are apparently a very good trader). So this one trade caused the entire company's market capitalization to go from $1000 to $800, and each of the other shareholders now has stock that is worth $8.

Now ask yourself the question: where did all that money go? And why didn't it help prop up the shares of company XYZ (or any other company in our hypothetical exchange)?

The answer is now obvious: the money didn't go anywhere. It simply disappeared. Based on one transaction between two shareholders, 98 other shareholders now have $2 less in their pockets. They didn't sell their XYZ company shares and redeploy the capital into another investment because none of those 98 people engaged in a transaction. They did nothing and the money simply went "poof" and vanished into thin air.

Just as values for stocks (or anything) can be created from nothing, so too can the money so many investors think as cash be destroyed without trace. [As an aside, why didn't these anchors ask over the last 3 years where all the money came from to create the higher prices for stocks?] In finance parlance, this process of creating and destroying wealth out of thin air is embodied in the phrase 'values are created at the margin.'

If he was honest, that strategist would have answered simply: 'Actually that money didn't go anywhere, it simply disappeared. And as a result, we shouldn't expect it to be redeployed into other assets and thus have a beneficial, propping-up effect on prices elsewhere in the financial infrastructure.'

Or at least that's what I would have said. Which is why I am not a good booking.
No positions in stocks mentioned.

The informatio= n on this website solely reflects the analysis of or opinion about the perf= ormance of securities and financial markets by the writers whose articles a= ppear on the site. The views expressed by the writers are not necessarily t= he views of Minyanville Media, Inc. or members of its management. Nothing c= ontained on the website is intended to constitute a recommendation or advic= e addressed to an individual investor or category of investors to purchase,= sell or hold any security, or to take any action with respect to the prosp= ective movement of the securities markets or to solicit the purchase or sal= e of any security. Any investment decisions must be made by the reader eith= er individually or in consultation with his or her investment professional.= Minyanville writers and staff may trade or hold positions in securities th= at are discussed in articles appearing on the website. Writers of articles = are required to disclose whether they have a position in any stock or fund = discussed in an article, but are not permitted to disclose the size or dire= ction of the position. Nothing on this website is intended to solicit busin= ess of any kind for a writer's business or fund. Minyanville management= and staff as well as contributing writers will not respond to emails or ot= her communications requesting investment advice.

Copyright 2011 Minyanville Media, Inc. All Rights Reserved.<= /p>

PrintPRINT
 
Featured Videos

WHAT'S POPULAR IN THE VILLE