Where has all the money gone?

0
Comment

September 16th, 2009

Billions have been slashed from stock markets. Where are they?

All the world’s markets have fallen and huge amounts of real money have disappeared. But has it? Where could it have gone? Questions are being asked, “When the headlines say ‘Billions slashed from the stock market’, where have the billions gone?” Another popular question is “I bought some shares for $1,000 last year and now they’re only worth $500. What’s happened to that other $500? Where’s it gone?” Would you believe that there are people walking around saying that what’s happening is all a scam and the “lost” money has been swiped by the financial services industry?

The answer

The answer is that when a share price changes, no actual money is involved in the change. All that changes is the perceived value of the shares in the minds of the buyers and sellers who make up the market. That perceived value may or may not reflect the true value of the piece of the company that a share represents. Investor ideas on value vary wildly and move share prices up or down to highs and lows that bear no relationship to the true value of those shares. Benjamin Graham, the great American economist and professional investor is considered the first proponent of Value Investing and he explained that, “In the short-run, the market is a voting machine, reflecting a voter-registration test that requires only money, not intelligence or emotional stability, but in the long-run, the market is a weighing machine.” So, when that investor bought those shares for $1,000 a year ago, that was the price on the market. The $1,000 went to the person who previously owned them. If the same shares are sold today for $500, that $500 will come from another investor, who is asking for that amount of money. In current opinion those shares are only worth $500.

So where’s the money?

The $1,500 in cash that existed (meaning the original $1,000 used to buy the shares last year, and the $500 that our latest investor pays to buy them now) is still there, just in different hands. It’s certainly not in the pocket of some scam-merchant in the industry and no one has taken any of it. The real money comes from the “weighing machine” part of Graham’s famous quotation. Investor sentiment does not count. All that matters is a company’s actual results. And a share price, which may have soared to great heights or sunk to suicidal lows as the market reacted to good or bad news, will keep going back to the real rational value of the company as determined by its actual financial performance.

Where is the money coming from?

Everyone who was in the market lost money. A person who was buying and selling shares in a limited portfolio of $5,000 has probably kissed goodbye to about half of his money, $2,500. Now that the market is on the upswing the question to ask is, where’s all the money coming from?

This entry was posted on Wednesday, September 16th, 2009 at 6:29 pm and is filed under Finance. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.

Where has all the money gone?

Leave a Reply