With the current stock market losses can you explain where the loss in value goes?
Great question, Brad,
May we try to put it into concrete terms? Suppose you owned a stock in the Weem, Acheit & Sellate Widget Company for which you had paid $10. Now you want to sell it but you can only get $6 for it. You’re asking, where is the other $4? The buyer who purchased your share for $6 doesn’t have your $4. The broker you might have used to facilitate the transaction doesn’t have it and W.A. & S. Widget Company doesn’t have it. So where did it go? That’s what you’re asking, right?
This question reminds us of a helpful old riddle. Three men had lunch together and the total bill came to $25. Each man handed the waiter a $10 bill. On his way back to the table with five $1 bills in change, the waiter had an idea. $5 change is hard to divide among the three diners, so the waiter pocketed $2 and gave each man $1.
With each man having handed over a $10 and got back $1 in change, each man ended up paying $9. Multiply by 3 as there were 3 men, so that comes to $27. Now remember the $2 in the waiter’s pocket and $27 + $2 = $29. Where is the missing $1? Did we start with $30, not $29? Who has the missing $1?
The answer to this restaurant riddle is that there is nothing missing. Each man paid $9 for a total of $27, of which $25 paid for their meal and $2 was placed in his pocket by the waiter. The correct equation is $27 – $2 = $25. You see, the presumption that what they paid PLUS the waiter’s $2 should equal $30 is flawed.
We really do hope you’ve read our book Thou Shall Prosper: Ten Commandments for Making Money. It has helped to transform the financial lives of so many readers. You might remember how the 8th chapter, Know Your Money, begins: Your money is a quantifiable analog for your life force–the aggregate of your time, skills, experience, persistence, and relationships. This is quite different from the dry definition that the professor gave you on day one of Econ 101 at your local kindergarten: Money is a medium of exchange.
The important thing to wrap your mind around is that money is spiritual not physical. What do we mean by this? Things whose dimensions and characteristics can be measured in a laboratory are physical. This includes cucumbers, saxophones, thermometers, and bottles. On the other hand, honesty, perseverance, music, and reputation are spiritual. So is money. The weight of a $100 bill is the same as the weight of a $5 bill. A $0.25 coin, a quarter, weighs more than the paper money but is worth less. It is worth less by human agreement.
If everyone on earth vanished, physical objects will still remain. However, spiritual things only exist in the context of human beings. A visitor from another planet wouldn’t take long to discover the use of a cucumber or a saxophone. But if that same intelligent space tourist came to planet Earth and found a few metallic discs or some strips of colored paper with numbers on them, there is no way it would mean anything to him at all. No amount of tampering with them would reveal their meaning.
If a physical object loses half of itself, we know someone took it. For example, if you have an apple and when you go to eat it, half is missing, then you know that someone came and ate half your apple and you’d find it in his stomach. However, if someone’s reputation is diminished, it hasn’t gone anywhere. Nobody took it. It’s just gone.
That is the first part of the answer to your question. The second part is best explored by examining the opposite of your question. Imagine you start up a company making lawnmowers. You raise capital by selling 100 shares at $10 each and you issue yourself as founder, 100 shares also. You now have $1,000 to start making lawnmowers. We bought one of those shares for $10 at your initial public offering.
Unexpectedly, the Surgeon General of the United States announced that sitting on the grass for an hour a day produces immunity to several diseases and regrows hair on bald heads. Suddenly everyone is tearing up driveways, rock gardens and parking lots and planting grass. Lots of it. The market realizes that there is going to be a massive demand for lawnmowers. People realize that lawnmower manufacturers like you are going to have more orders than they ever dreamed of and profits are going to skyrocket. Everyone wants a share of your company.
Not surprisingly, I get many offers for my one share in your company. But because so many people are trying to obtain a share, they offer us far more than the $10 we paid. In fact, we sold our share for $30; we made a profit of $20. Many of the 99 other shareholders also sell at $30, while some hold out anticipating still higher prices.
You are busily turning out lawnmowers from morning to night but that evening you come home and catch your breath. That’s when you realize that you own 100 shares in the company. Those shares are now worth about $3,000. That’s right, the market in its current state would be delighted to buy your block of founders stock and place in your hand $3,000 if you so choose. Our question for you is who lost the money you now have? The answer is nobody. A crowd of individual investors started feeling super confident about the prospects of your company. They saw the potential of future profits and they wanted in. They priced the value of the share owned by Mrs. Lapin and me at about $30. They would happily offer to buy our share as well as your 100 shares which are worth more money than they were last week. You are richer than you were but nobody is any poorer.
Similarly, when the value of a share you own declines from, say, the $10 you paid all the way down to $6, nobody has the missing $4. It’s just that a large number of individual human beings feel that because of poor performance on the part of the company that had issued the share, their desire for that share had declined and they would now pay only $6.
This dynamic could also have happened had you kept your $10 in cash and not purchased the share. For instance, the number of people in the world who want to own U.S. dollars could decline and the actual value of your $10 might drop to $8. (We are not considering inflation in this discussion, only currency exchange fluctuations.)
Thus, you can see that just like reputation or music, money is also not tangible. It’s existence, and even its value, depend on the beliefs and interactions of large numbers of other people. If they all, in aggregate, decide that the house for which you paid $100,000 last year is now worth only $90,000, your net worth is down by $10,000 but there is nobody in the world who is saying to himself, “Oh great! Brad’s bad luck is my good luck. Because his house lost $10,000 of value, mine just went up by $10,000”. Your lost $10,000 of value never went anywhere in particular. It just vanished. Just as with a sadly dissolving marriage, one might ask, “Where did all the love I saw on their honeymoon go?” Love is also a spiritual phenomenon. That means it can vanish. It doesn’t mean that the married couple next door suddenly have more love. Just like the restaurant riddle, the presumption that the missing value of the share must be somewhere is flawed.
With earnest hopes that you will be more afflicted by unexplained gains than losses,
Rabbi Daniel & Susan Lapin