Joe:
I disagree with your conclusion regarding wealth and share prices. If you bought $15,000 worth of Microsoft stock at the IPO and went into a cave, you would come out today with a (pretax) net worth in excess of $1.6mm...clearly "wealth" had been created.
What people miss is that a slow and orderly market decline redistributes wealth, while a disorderly and sudden collapse basically causes capital...on a mark-to-market basis...to disappear. For example, if you owned that $1.5mm of MSFT stock and tomorrow the stock opened down 50% at $47, one-half of your net worth would have simply vanished. In contrast, if the stock began a slow, but steady, descent from $94 to $47 over a six month period, you would have the opportunity to sell some of your holdings and prevent some of the capital dissipation. In the latter case, wealth is redistributed..you still have less than you would have if the stock had risen, but part of your potential loss was mitigated by the counter-party who bought part of your position.
Bottom line...sudden, precipitous, declines in stock values do reduce wealth on a mark-to-market basis. While the underlying corporate value does not change, your ability to monetize this value has been impaired. The wealth destruction effect is exacerbated by investors' tendency to allow their emotions to take over, i.e. to sell when prices are falling and buy when prices are rising.
Best regards,
Gregg |
