I grew up hearing stories of my dad’s college days. One such story included an acquaintance that owned a pair of pants that he did not wash until they were told to have disentigrated. The pants at one point in time could stand up in a corner on their own from all of the materials that had been collected in the fibers of the fabric. My personal hygiene alarm goes off every time that story comes to mind. My skin crawls with the imaginary microbes, bacteria and germs that those pants must have harbored. The pants were not standing up because they were filled with something, namely legs, but instead they were standing up because of external influences.
I had a realization this week as I was pondering the significance of the numbers of trillions of dollars that have been lost globally in various financial markets. The realization was not one that I should have had to wait until 31 to have and I wanted to pass it along in case others had not been exposed to it: The stocks in the market may very well need a good washing because there are not always legs holding up their pants. Each stock is not worth the value that is given to it on the market that day, it is worth the value the people (thankfully not germs) put on it and built into the fibers of the stock the minutes, hours, days, weeks, months, or years before. But unless the companies behind the stocks are actually doing amazingly good things and you’re owning a piece of a real company that is worthy of ownership, you could be buying extra crunchy pants.
You could be hard pressed to find a company that is worth the esteemed value of the stock, but it is important to remember that not each person who owns a $132/share stock paid $132 per share. They might have paid $32.00/share and others after them paid more than that. Obviously that’s why the investor makes money if they buy at $32.00 and sell at $132.00, but when the market tumbles and share values drop its not a loss of actual wealth, its the loss of unrealized wealth. There’s a BIG difference. Its not that the estimated value doesn’t matter, but instead it is important to have the principles of the theory behind the market in mind as you’re looking at the numbers. If I buy a stock at $32.00 and sell it at $30.00 I very literally lose $2.00 per share (plus any trading fees to buy the stock and to sell the stock). What you need to realize is that as an investor I may have also missed the unrealized reward of the stock jumping to $64.00 per share and in an attempt to ‘hold out for more’ the stock reversed and dropped me down to where I realized the stock was going to go down to less than I paid for it and by the time I could find a buyer, it had devalued to less than my original buying price. Realized and unrealized wealth are two different things and when the media or overly dramatic persons speak about trillions of dollars in wealth disappearing, it isn’t all like real dollars going up into real smoke (we’ll ignore the carbon footprint of that smoke & money fire), it is some real smoke and some real fire shot from an impressive camera angle that makes the pants look taller than they are. They’re standing in the corner, looking tall and legless, but they’re still pants, and they still need to be estimated at a reasonable value that reflects the worth of the company – much like pants that really, really should have been washed so that I never, ever had to hear stories of my dad’s friend’s pants that probably smelled foul.
Ewwwwww.
