Where does the money go when stocks and bonds are in the red ?

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burt
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Where does the money go when stocks and bonds are in the red ?

Post by burt » Thu Feb 25, 2016 7:13 pm

When looking at my portfolio returns today I noticed everything is green (positive).
Large blend, large value, small blend, small value, TIPS, Total Bond, short term bond... all positive.

Question:

When everything is green (positive).... Where did all the money come from ??
OR
When everything is red (negative).... Where does all the money go ??

burt

danaht
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Re: Where does the money go when stocks and bonds are in the red ?

Post by danaht » Thu Feb 25, 2016 7:16 pm

Probably the answer to both questions is "cash". But also - you can only buy at prices other people are willing to sell. If no one is willing to sell something at a certain price - then the price goes up to the point where people are willing to sell it.

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Re: Where does the money go when stocks and bonds are in the red ?

Post by sport » Thu Feb 25, 2016 7:30 pm

There is no "money". When you see the price of a share of stock or a bond, what you see is the amount it could be sold for. It is just the price that that investment is trading for at the moment.

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Re: Where does the money go when stocks and bonds are in the red ?

Post by randomguy » Thu Feb 25, 2016 7:38 pm

burt wrote:When looking at my portfolio returns today I noticed everything is green (positive).
Large blend, large value, small blend, small value, TIPS, Total Bond, short term bond... all positive.

Question:

When everything is green (positive).... Where did all the money come from ??
OR
When everything is red (negative).... Where does all the money go ??

burt
What money? Simple example. I found a company with 1k shares for 1 dollar. I sell 10 of them 100 dollars. How much money money was invested? 1k. How much is my company worth? 100k. Were did the 99k dollars come from? Now the share price drops to 50 bucks. Where did the 50k dollars go? Well they never really existed.

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Re: Where does the money go when stocks and bonds are in the red ?

Post by bertilak » Thu Feb 25, 2016 7:43 pm

Let's say I offered you $10,000 (Blue Book value) for your Ford and you said you had to think about it.

A week later I come back and say OK, I'll give you $11,000 to help you make up your mind but you still need to think about it. Have you just made $1,000? If so, where did the money come from?

Another week goes by and I say, well, I just got laid off so best I can give you is $9,000. (Still no deal: You are wishing you took the $11,000.) Have you now lost money? If so, where did it go to?

Would it be any different if it was Ford stock instead of a Ford car?
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Re: Where does the money go when stocks and bonds are in the red ?

Post by in_reality » Thu Feb 25, 2016 8:30 pm

Some goes to cash/bonds/safe assets. In any downturn, you can see stock fund outflows.
Some value is "destroyed". In any downturn, the outflows + current market value < prior market value.

I think inflows and outflows amplify valuations. This is why we see boom busts.

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Re: Where does the money go when stocks and bonds are in the red ?

Post by Toons » Thu Feb 25, 2016 8:36 pm

Now You See It,
Now You don't .
It was imaginary ,
unless you realize it. :happy
"One does not accumulate but eliminate. It is not daily increase but daily decrease. The height of cultivation always runs to simplicity" –Bruce Lee

dbr
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Re: Where does the money go when stocks and bonds are in the red ?

Post by dbr » Thu Feb 25, 2016 8:37 pm

The simplest answer is probably that stocks and bonds aren't money, so there was never any money there to start with, to increase or to decrease.

Your money went away when you bought the investment. You can get money back when you sell the investment. The original exchange of money for investment was when the stock was first issued and in that case the investors turned over their money to the company. What the company has done with the money depends. Hopefully they spent it to buy equipment, pay people to develop and market products, etc., etc. Maybe they put some of the money in their own pockets. If a company goes private they might pay money out again for return of the stock.

Bonds are a little different as they are in fact a loan. I suppose one might think of the bond itself as a contract to return the money at a given time and pay back some interest as it goes along. But an investment in bonds is not money.

One issue that creates some of the strange concept here is, as mentioned just above, that we are dealing with valuation. All those stocks and bonds are "valued" at the price someone most recently actually bought or sold a share at. That does not mean there is money there to the extent of multiplying that price by the total number of shares.

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Re: Where does the money go when stocks and bonds are in the red ?

Post by dbr » Thu Feb 25, 2016 8:38 pm

Toons wrote:Now You See It,
Now You don't .
It was imaginary ,
unless you realize it. :happy
What I said in four neat lines. 8-)

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Re: Where does the money go when stocks and bonds are in the red ?

Post by Toons » Thu Feb 25, 2016 8:40 pm

dbr wrote:
Toons wrote:Now You See It,
Now You don't .
It was imaginary ,
unless you realize it. :happy
What I said in four neat lines. 8-)
:sharebeer
"One does not accumulate but eliminate. It is not daily increase but daily decrease. The height of cultivation always runs to simplicity" –Bruce Lee

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Re: Where does the money go when stocks and bonds are in the red ?

Post by itstoomuch » Thu Feb 25, 2016 9:24 pm

Modern financial-monetary systems rely on a three legs: Banking, Insurance, and Equity/Bond Markets. What is gained or lost in banking also happens similarly in Insurance and Equity Markets.
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Re: Where does the money go when stocks and bonds are in the red ?

Post by dmcmahon » Fri Feb 26, 2016 1:10 am

Although some shares are actually entering (IPOs) and leaving (buyouts, share repurchases) the market in exchange for cash, this isn't most of the swings you're seeing. Rather, you are seeing the changing estimates of the value of the businesses represented by the shares. The market makes its judgement, and then every share is re-priced even if only a few shares actually change hands. Obviously, try to buy up every share and the price spikes, try to unload your founder's position all at once and it tanks, but otherwise it's just theoretical.

That IPO someone mentioned presumably offered some value in excess of what the founders spent to develop it - yup, that's investing! The business presumably adds value in excess of the cash spent to bring it into existence, that doesn't make the value any less real. If I spend $1000 to build a magic machine that produces $500 worth of some valuable product or service every year, is it still worth only the $1000 I spent? Suppose the value of the product is set to rise, or fall, in future, does this change what you'd pay for my magic machine? Suppose the machine's output of the valuable product varies from year to year, is it worth more or less to you now? What if I built the machine some years ago and the trend in the variable output is generally increasing at 10% per year, is it worth more? What if, on further analysis, it looks more like 2% long term? And so it goes.

I went to grad school at the time of the 1987 market crash. Were billions of dollars of wealth actually lost/destroyed? Or would it be more accurate to say that billions of dollars of confidence in the future had disappeared? As opposed to, say, a hurricane wiping out parts of the east coast, where real wealth is literally destroyed.

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Re: Where does the money go when stocks and bonds are in the red ?

Post by Valuethinker » Fri Feb 26, 2016 4:49 am

burt wrote:When looking at my portfolio returns today I noticed everything is green (positive).
Large blend, large value, small blend, small value, TIPS, Total Bond, short term bond... all positive.

Question:

When everything is green (positive).... Where did all the money come from ??
OR
When everything is red (negative).... Where does all the money go ??

burt
You buy a house for $500k in 2007.

It's now worth $300k. Where did the money go?

Answer:

- to the person who sold you the house IF they did not reinvest in another house (retiring, dying etc.)
- if you default and there is a short sale, the money is lost by the entity that gave you the mortgage (or see The Big Short: by the bond investors that invested in the CDOs that were created from the securitzation of your mortgage)

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Re: Where does the money go when stocks and bonds are in the red ?

Post by Xyz214 » Fri Feb 26, 2016 5:09 am

sport wrote:There is no "money". When you see the price of a share of stock or a bond, what you see is the amount it could be sold for. It is just the price that that investment is trading for at the moment.
There's money! Stock price goes up because someone put in money into the stock and it goes down because someone withdraw the money.

Here's an oversimplified example.

T0 You have little world of 5 people. Each of them has 100.

T1 Person1 started a company and sold services to the other 4. As a result, Person1's money increased from 120 and the other 4's money drop to 95.

T2 Person1 decided to sell equity stake to his company issuing 4 shares each valued at 10 keeping 2 shares for himself and selling 2 shares to Person2. Now, person1 has 140, person2 has 75, the rest has 95 each.

T3 The company continued to offer services and made 30 and distributed it to the two shareholders. Now, Person1 has 155, person2 has 90 and the rest has 85.

T4 Person2 sold his two share to Person3 each valued at 15. Now, person1 still has 155, person2 has 120, person3 has 55 and the rest has 85.

And so on.

Note that from T0 to T4, the total wealth of the world remained at 500. No money was created out of thin air.

Let's say there's the FED bank that created 500 worth of money out of thin air and distributed them to the 5 people. This doesn't invalid my point because if any person bought shares from another person, real money was still exchanged between parties. After trading, the total wealth of the world remained at 1000. In other words, trading doesn't create money.

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Re: Where does the money go when stocks and bonds are in the red ?

Post by dkturner » Fri Feb 26, 2016 6:22 am

I think you're having trouble understanding "where does the money go" because you're looking at stock/bond sales as though they were redemptions (like redeeming a certificate of deposit at your local bank) rather than exchanges with another investor (which is how your stocks/bonds "go away"). When your certificate of deposit is surrendered it ceases to exist. You get cash and your bank cancels your cd. When you sell your Stock/bond you simply swap it with another investor. It continues to exist, though it may be less valuable. "The money" is simply a handy way of keeping score. You sell your stock/bond for $100 and you receive a $100 bill from the buyer who now owns your stock/bond but has $100 less cash. If it declines in value and you sell another share tomorrow you receive four $20 bills and the buyer now has only $80 less cash. The number of shares never changes but the amount of cash that changes hands varies from day to day, but is always the same amount for the buyer and the seller on the "swap day".

The concept is really so elementary that it seems perplexing, because it lends itself to overthinking.

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Re: Where does the money go when stocks and bonds are in the red ?

Post by jwillis77373 » Fri Feb 26, 2016 6:29 am

Pessimistically -- "into fees" for selling and trading.

Realistically -- "nowhere" if it was worth $1 yesterday, its worth $1 today

The only thing really changing are peoples "instantaneous" expectations of future profits, or their need to exit the market.

We like to say "don't time the market" -- but sooner or later we all have to do that, in order to exit the market, what we have on our side is the ability to "judge" the market, and possibly defer exiting until we see some sort of advantage versus disadvantage. Over long periods of time the advantages can be numerous, profits, inflation, capital gains taxes, lower income tax bracket. The cpi and deflation however are the yang to the yin. We also become somewhat "wiser" in our spending patterns (at least we hope).
Last edited by jwillis77373 on Fri Feb 26, 2016 2:22 pm, edited 1 time in total.

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Re: Where does the money go when stocks and bonds are in the red ?

Post by JoMoney » Fri Feb 26, 2016 7:07 am

Where it always was... In the future. Stocks and bonds aren't money, they're just priced for estimates about some future money. If everybody wanted there money in stocks and bonds presently, they'd be very disappointed. It doesn't exist yet
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham

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burt
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Re: Where does the money go when stocks and bonds are in the red ?

Post by burt » Fri Feb 26, 2016 5:34 pm

Thank-you all for your replies.
Some excerpts:

"-When you see the price of a share of stock or a bond, what you see is the amount it could be sold for."
-"Now You See It, Now You don't, It was imaginary."
-"The only thing really changing are peoples "instantaneous" expectations of future profits, or their need to exit the market."
-"Where it always was... In the future."

Kind of makes me want to put my money into something real, like food, clothing, shelter.
Maybe I'm making this more difficult than it need be..... regardless, I will continue my studies of the 5th dimension. :oops:

burt

"Mathematical approaches were developed in the early 20th century that viewed the fifth dimension as a theoretical construct. These theories make reference to Hilbert space, a concept that postulates an infinite number of mathematical dimensions to allow for a limitless number of quantum states. Einstein, Bergmann and Bargmann later tried to extend the four-dimensional spacetime of general relativity into an extra physical dimension to incorporate electromagnetism, though they were unsuccessful.[1] In their 1938 paper, Einstein and Bergmann were among the first to introduce the modern viewpoint that a four-dimensional theory, which coincides with Einstein-Maxwell theory at long distances, is derived from a five-dimensional theory with complete symmetry in all five dimensions. They suggested that electromagnetism resulted from a gravitational field that is “polarized” in the fifth dimension."

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Re: Where does the money go when stocks and bonds are in the red ?

Post by mptfan » Fri Feb 26, 2016 6:06 pm

Let's say you have a car that is worth $20,000 and you get into an accident and now the car is worth $15,000 because it has significant damage. Where did the $5,000 go?

I think the answer is that there was no "money" there to begin with. Rather, there was an asset with an certain value, and that value dropped. Since there was no money to begin with, there was no money to "go" anywhere.

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Re: Where does the money go when stocks and bonds are in the red ?

Post by dbr » Fri Feb 26, 2016 6:14 pm

mptfan wrote:Let's say you have a car that is worth $20,000 and you get into an accident and now the car is worth $15,000 because it has significant damage. Where did the $5,000 go?

I think the answer is that there was no "money" there to begin with. Rather, there was an asset with an certain value, and that value dropped. Since there was no money to begin with, there was no money to "go" anywhere.
Yes. The actual complete answer is that stocks and bonds are not money and, as stated above, "there was no money to 'go' anywhere."

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Re: Where does the money go when stocks and bonds are in the red ?

Post by Phineas J. Whoopee » Fri Feb 26, 2016 6:31 pm

If by money you mean stacks of $100 bills, which I don't suppose you do, as others have posted there never was any in the first place. If you're using another definition of money, like perhaps one or more of its functions, then if you'll tell us what you mean we can probably answer.

To put it another way, it's a good topic for discussion, but not if it devolves into yet another argument about what money is. Given a working definition of the question I think we can get somewhere.

PJW

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Re: Where does the money go when stocks and bonds are in the red ?

Post by Tanelorn » Fri Feb 26, 2016 7:00 pm

For every buyer, there is a seller. Every trade swaps cash for stock (or v versa), but no more money is created or destroyed. There is no "cash on the sidelines" that sometimes goes into or out of the market - that's an incorrect saying. The amount of cash in the world is constant, up to the guys with the printing presses, and it's always on the sidelines.

When market prices rise, the whole stock market is more valuable; conversely when prices fall, the whole market is less valuable. Nothing to do with cash coming or going - just a change in supply and demand based on what people's aggregate expectations are at the time.

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Re: Where does the money go when stocks and bonds are in the red ?

Post by randomguy » Fri Feb 26, 2016 7:15 pm

Valuethinker wrote:
burt wrote:When looking at my portfolio returns today I noticed everything is green (positive).
Large blend, large value, small blend, small value, TIPS, Total Bond, short term bond... all positive.

Question:

When everything is green (positive).... Where did all the money come from ??
OR
When everything is red (negative).... Where does all the money go ??

burt
You buy a house for $500k in 2007.

It's now worth $300k. Where did the money go?

Answer:

- to the person who sold you the house IF they did not reinvest in another house (retiring, dying etc.)
- if you default and there is a short sale, the money is lost by the entity that gave you the mortgage (or see The Big Short: by the bond investors that invested in the CDOs that were created from the securitzation of your mortgage)

That is for the person buying and selling. The stock market is more like
a) you buy a house for 400k. Your neighbor sells an identical house for 1 million. DId you make 600k? What about when the third neighbor sells his for 600? Have you made 200k or lost 400k?

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Re: Where does the money go when stocks and bonds are in the red ?

Post by SeeMoe » Fri Feb 26, 2016 10:06 pm

Toons wrote:Now You See It,
Now You don't .
It was imaginary ,
unless you realize it. :happy
" unless you realize it." Meaning sell the asset. Good, short point.
SeeMoe.. :idea:
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Re: Where does the money go when stocks and bonds are in the red ?

Post by Phineas J. Whoopee » Fri Feb 26, 2016 10:14 pm

Tanelorn wrote:... The amount of cash in the world is constant, up to the guys with the printing presses, and it's always on the sidelines.
...
The guys with the printing presses are commercial banks, which, by lending, create most of the circulating money supply. Presumably that's what you mean.
PJW

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Re: Where does the money go when stocks and bonds are in the red ?

Post by 123 » Fri Feb 26, 2016 11:10 pm

burt wrote:When looking at my portfolio returns today I noticed everything is green (positive).
Large blend, large value, small blend, small value, TIPS, Total Bond, short term bond... all positive.

Question:

When everything is green (positive).... Where did all the money come from ??
OR
When everything is red (negative).... Where does all the money go ??

burt
The Cloud.
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Re: Where does the money go when stocks and bonds are in the red ?

Post by basspond » Sat Feb 27, 2016 4:26 am

Think of "money" as a bartering item to make exchanging assets easier. It is impossible and impractical to create enough cash to cover all asset exchanges. But when the market goes up the money will come from potential buyers, down and it is lost by potential sellers.

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Re: Where does the money go when stocks and bonds are in the red ?

Post by Valuethinker » Sat Feb 27, 2016 1:27 pm

randomguy wrote:
Valuethinker wrote:
burt wrote:When looking at my portfolio returns today I noticed everything is green (positive).
Large blend, large value, small blend, small value, TIPS, Total Bond, short term bond... all positive.

Question:

When everything is green (positive).... Where did all the money come from ??
OR
When everything is red (negative).... Where does all the money go ??

burt
You buy a house for $500k in 2007.

It's now worth $300k. Where did the money go?

Answer:

- to the person who sold you the house IF they did not reinvest in another house (retiring, dying etc.)
- if you default and there is a short sale, the money is lost by the entity that gave you the mortgage (or see The Big Short: by the bond investors that invested in the CDOs that were created from the securitzation of your mortgage)

That is for the person buying and selling. The stock market is more like
a) you buy a house for 400k. Your neighbor sells an identical house for 1 million. DId you make 600k? What about when the third neighbor sells his for 600? Have you made 200k or lost 400k?
Agreed, if you just hold onto a share.

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Re: Where does the money go when stocks and bonds are in the red ?

Post by itstoomuch » Sat Feb 27, 2016 1:31 pm

I only M-t-M when everything is green. :wink:
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Re: Where does the money go when stocks and bonds are in the red ?

Post by White Coat Investor » Sat Feb 27, 2016 1:36 pm

burt wrote:When looking at my portfolio returns today I noticed everything is green (positive).
Large blend, large value, small blend, small value, TIPS, Total Bond, short term bond... all positive.

Question:

When everything is green (positive).... Where did all the money come from ??
OR
When everything is red (negative).... Where does all the money go ??

burt
It is created.

Then it is destroyed.

Seriously. This idea that it isn't there if it isn't realized is silly. It's there. Then it goes away. It doesn't go anywhere. It disappears.

If you really want to get technical/philosophical, it is created by the exchange of peoples' life energy- i.e. adding value. I guess that comes from the Sun in the end.
1) Invest you must 2) Time is your friend 3) Impulse is your enemy | 4) Basic arithmetic works 5) Stick to simplicity 6) Stay the course

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Re: Where does the money go when stocks and bonds are in the red ?

Post by MEA » Sat Feb 27, 2016 3:52 pm

burt wrote:When looking at my portfolio returns today I noticed everything is green (positive).
Large blend, large value, small blend, small value, TIPS, Total Bond, short term bond... all positive.

Question:

When everything is green (positive).... Where did all the money come from ??
OR
When everything is red (negative).... Where does all the money go ??

burt
That's a good question. I am not sure I can answer it, but I will try.
It's a difficult question because we think of money as something that is real, or tangible, it's not. Money is not real or tangible unless you separate it from time. But you can't separate anything from time.

The question you are really asking is what is the value of money at any given time? It's difficult because you have to understand what time is. After all time is money.

If you ask me what money is. I can answer that. It is all the goods and services produced represented by digits. The digits can be divided up and distributed. If you ask me what time is I know what time is and you know what time is but when I try to explain to you what time is very quickly it becomes clear to me that I don't know what time is. So where does money go when stocks and bonds are in the red. well... I suppose that it disappears into time. Will it come back? well... I suppose... in time.
“Stay the course is the most important piece of advice I can give you.”-Bogle

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Re: Where does the money go when stocks and bonds are in the red ?

Post by Oicuryy » Sat Feb 27, 2016 6:52 pm

It's cooler than it was. Where did the degrees go?
It's lighter than it was. Where did the pounds go?
It's shorter than it was. Where did the inches go?
It's dimmer than it was. Where did the lumens go?
It's slower than it was. Where did the feet per second go?
It's worth less than it was. Where did the dollars go?
Money is fungible | Abbreviations and Acronyms

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burt
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Re: Where does the money go when stocks and bonds are in the red ?

Post by burt » Sat Feb 27, 2016 8:04 pm

[/quote]
It is created.
Then it is destroyed.
Seriously. This idea that it isn't there if it isn't realized is silly. It's there. Then it goes away. It doesn't go anywhere. It disappears.
If you really want to get technical/philosophical, it is created by the exchange of peoples' life energy- i.e. adding value. I guess that comes from the Sun in the end.[/quote]

"Exchange of Peoples Life Energy"
"Comes from the Sun"

Very good!
Makes me think that infinite growth in a finite world is not possible.

burt

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Re: Where does the money go when stocks and bonds are in the red ?

Post by MEA » Sun Feb 28, 2016 12:19 pm

burt wrote:
It is created.
Then it is destroyed.
Seriously. This idea that it isn't there if it isn't realized is silly. It's there. Then it goes away. It doesn't go anywhere. It disappears.
If you really want to get technical/philosophical, it is created by the exchange of peoples' life energy- i.e. adding value. I guess that comes from the Sun in the end.[/quote]

"Exchange of Peoples Life Energy"
"Comes from the Sun"

Very good!
Makes me think that infinite growth in a finite world is not possible.

burt[/quote]



You can think of money as energy. The energy it takes to create the nations GDP. The human energy, electrical energy, energy from oil. All the energy it takes to produce all of our goods and services. One of the four functions of money is store. We store the energy as money and use it later.

The problem is you can not create or destroy energy. It can only change form. You can create and destroy money. Money is not energy.

Our money represents our energy. But it only exists in our head, it's not real. It only becomes real and something that we can use when we assign it a value.

So the question is, or the question I have is how does the world assign money its value?

The allies won World War II, we have two thirds of the worlds gold, we have the strongest military on the planet. Surely you have to consider all these things when valuing money?
“Stay the course is the most important piece of advice I can give you.”-Bogle

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Re: Where does the money go when stocks and bonds are in the red ?

Post by longinvest » Sun Feb 28, 2016 3:46 pm

mptfan wrote:Let's say you have a car that is worth $20,000 and you get into an accident and now the car is worth $15,000 because it has significant damage. Where did the $5,000 go?
I like this example, because it clearly illustrates the concept of value, and how an accident destroys value, where nobody makes any money off the destruction (more so if the owner decides to fix himself the car so that it still works, even if it doesn't look as good).

Another example uses the same $20,000 car. But now, a new company launches on the market a more efficient car that costs significantly less to produce. This new car, superior to the $20,000 car in almost all aspects, is sold with a price tag of $15,000.

The resale value of the used $20,000 car drops to $12,000. Where did the $8,000 go? Did somebody harvest this $8,000$?

Value is in the eye of the beholder. :wink:
Bogleheads investment philosophy | Lifelong Portfolio: 25% each of (domestic/international)stocks/(nominal/inflation-indexed)bonds | VCN/VXC/VLB/ZRR

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