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Strategies & Market Trends : Booms, Busts, and Recoveries -- Ignore unavailable to you. Want to Upgrade?

To: Ilaine who wrote (4332)	6/5/2001 3:41:16 PM
From: Maurice Winn	Read Replies (1) \| Respond to of 74559

<Take hypothetical company XYZ with a billion shares outstanding. It was chugging along at $20 a share for decades - all of a sudden it comes out with a widget that is the greatest thing since sliced bread - and the shares skyrocket to $100 a share. The total market cap goes from $20 billion to $100 billion, but the float is only a million shares. Where did the money come from? Then Rambus decides to sue it for patent infringement, and the shares plummet to $10 a share. The market cap is now $10 billion. Where did the money go?> I think the confusion arises because we value things in $. The only thing which can truly be valued in $$ are $$. Everything else is a transient valuation on the day. There is no capital creation or destruction by valuations being bid up or bid down. Just a change in value and if there are sales at those prices, transfers of money from one person to another. The capital creation occurs when the company which got the money uses it to build really good things which produce a huge bottom line and great benefits to the buyers of the widgets. If they use the money to build really dumb things, then as the money is spent, the capital is destroyed. In similar vein, if somebody comes by from a rich place and offers a huge price for my house, but I decide it is worth even more, so ask for even more, because one neighbour sold their house at a high price, it doesn't mean all the houses are now worth that much and that much capital value has been created. It just means people have gone nuts temporarily. Sooner or later, they'll wake up and the sellers will have ended up with the money and the buyers will have lost their shirts. But no capital will have been created or destroyed. The dot.gones destroyed quite a bit of capital, but only the capital they received in their share IPOs [and earlier funding]. The huge subsequent market values were just trading prices, with winners and losers, but no capital destruction. There hasn't really been much capital destruction [as a percentage of the total capital and continued creation of capital]. Sure, there are concentrated pockets of vast destruction, such as Iridium and if it's true that there really isn't value in Globalstar as currently predicted by the share price, then that investment will also have been a huge capital destruction [about $4bn]. $19 trillion to $14 trillion isn't capital destruction. It's just market capitalisation change. Simply an ethereal valuation change in the fevered minds of investors who don't really have much idea of value because the future is hard to predict. It does make real changes in the economy though, because that wealth effect destruction causes dramatic spending changes in those who used to have that imaginary money when all they really had was dot.gone shares. To that we need to add the fact that the $ is an infinitely stretchy imaginary thing too. Any number can be printed! Lots are. That means they are on a never-ending decline in value and not worth holding in the long run. In the long run, productive assets are the thing to own; that's companies which employ brilliant creative people, not land, buildings, gold or platinum [though those do have some value and do produce profit]. Guessing which companies and people are the good ones is the tough part. Mqurice

To: Ilaine who wrote (4332)	6/5/2001 5:57:56 PM
From: Don Lloyd	Read Replies (1) \| Respond to of 74559

CB - I read through Maurice's reply siliconinvestor.com twice and couldn't find anything to disagree with. Just a couple of things to add. It doesn't require a company making dumb things to destroy capital. The destruction of capital is also the inevitable result of productivity advances, especially technology-based ones. A factory full of perfectly good capital production equipment today becomes the target of a scrap material auction tomorrow as new technology obsoletes it. It is the suppliers of productivity enhancing equipment who benefit, and the final consumers who pay lower prices. The buyers and users of technology enhancing equipment are lucky to merely survive as they keep having to remain competitive as most advances are available to all of the competitors. Regards, Don