Silicon Investor (SI) -- The First Internet Community

STOCKTALK

We've detected that you're using an ad content blocking browser plug-in or feature. Ads provide a critical source of revenue to the continued operation of Silicon Investor. We ask that you disable ad blocking while on Silicon Investor in the best interests of our community. If you are not using an ad blocker but are still receiving this message, make sure your browser's tracking protection is set to the 'standard' level.

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

To: Cogito Ergo Sum who wrote (6136)	7/20/2001 12:13:01 PM
From: Cogito Ergo Sum	Respond to of 74559

And this is interesting. Message 16105503

To: Cogito Ergo Sum who wrote (6136)	7/26/2001 10:37:23 AM
From: Ilaine	Read Replies (1) \| Respond to of 74559

OK, I found the previous discussion about quantifying loss of wealth by total market cap - it was back in March, on a couple of threads: CB starts the discussion in the CFZ:"When you are talking about the bubble bursting, how do you quantify the amount of actual loss?" Message 15531256 Banter: Message 15531277 Message 15531296 Don explains "net net" Message 15531348 Chic does the math: Message 15531357 Pearly tries to explain using particle physics: Message 15531666 John Shannon: "Society has created no extra wealth": Message 15532221 CB moves the discussion to another thread to avoid miffing the players while the casino is open: Message 15532787 This should be multiple replies: siliconinvestor.com Grace: "The money was never really there." Message 15534303

To: Cogito Ergo Sum who wrote (6136)	7/26/2001 11:00:11 AM
From: Ilaine	Read Replies (2) \| Respond to of 74559

I've been thinking about how to explain the concept, and came up with an analogy which I like, see if you like it too. Company XYZ has 1 billion shares of stock, keeps 500 million in the treasury, and sells 500 million at an IPO. On the day of the IPO, the shares sold for $5, so the total market cap is $2.5 million. It should be obvious when reading the above that total market cap doesn't give you a lot of information, because it doesn't tell you anything about the shares which are in the treasury - what are those worth? Further - as we all know - total market cap doesn't tell you anything about what the company is actually worth. The assets are valued using book value. Other methods of valuation would be sales revenue, earnings, etc. The only thing $5 tells you is what the stock sold for at 4 p.m. on the date of sale. It could have opened at $100 and plummeted down to $5 - it could have opened at $1 and soared to $5. Who knows? Now suppose that on IPO day, 400 million shares were bought by large institutions that never, ever trade. That leaves 100 million shares in the hands of people who do trade. So the market cap is going to be determined by the float - what does that tell you about the shares which have been authorized but never sold? What does that tell you about the shares that never trade? If the shares in the float trade at $50, are all the authorized shares "worth" $50? Are all the outstanding share "worth" $50? Obviously, they are only worth $50 if you actually sell them for $50. What the price is in the newspaper is helpful information, but that only tells you what one set of buyers paid one set of sellers at one time on one day. Further, because every time someone buys a share, the transaction is zero sum - if I pay $5 to you, then you get $5 from me. Nothing is "lost." Nothing is "destroyed." Thus, it is meaningless to say that wealth is destroyed when stock prices go down, just as it is meaningless to say that wealth is created when stock prices go up. ~~~~~~~~~~~~~~~~~~~~~~~~~ That said, I know for a fact that people who look at their brokerage statements feel rich when the net value goes up and feel poor when the net value goes down. So if I tried to explain to them that they haven't lost anything when the market crashes, they'd either laugh at me or string me up.