Where'd the Money Go?
It simply disappeared...
'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.
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