Quote:
Originally Posted by chipj29
Thanks Woodsy. 
I know I am asking dumb questions, and I accept it for what it is. I am an educated guy, and actually am kinda smart. I am just lacking the skills pertaining to investments and the economy etc. Never been a strong suit of mine. I do follow my 401k, and have it spread out over 5 funds, plus my company stock. Fortunately most of my nest egg is not controlled by me, and is strictly in municipal bonds, so I don't have to worry about my 401k so much. |
Many years ago my great Uncle made quite a bit of money on stock investments. He told me a little then about investing in stocks and I have learned a bit more on my own. Back in his day most stocks were in companies that manufactured things. The people that bought those stocks carefully looked at the company and it's business. If a company made farm equipment it was possible to estimate the market needs for new farm equipment and the likelihood that a particular company would prosper or not. The people that invested were interested in the real ability of a company to do business, essentially to sell its products, make a profit, and grow.
That is no longer true.
Value of a company's stock today is largely based on opinion of the stock's glamor. Since the stock (or really any type of investment) value is opinion based the value can shift very rapidly. To add to the power of this opinion is the fact that a lot of stock is managed by large investment firms. When they decide a stock has lost its glamor they start to unload it and that drives the price down, almost a self fulfilling prophecy.
The practical reality is this. I own a piece of paper that says I have rights to shares of XYZ company. Although it actually is a "piece" of the company, its value may have little to do with the actual physical value of the real company. So today, with everyone's good opinion of XYZ those shares are worth $10,000. Tomorrow, people hear something they don't like about XYZ company, perhaps that one of their biggest customers has cut their order by 50%. The glamor of the stock fades, some institutional investors dump the stock, and presto-chango the shares are now only worth $6,000. $4,000 in value has been "lost"! Where did it go? It wasn't real to begin with, it was based on an opinion of value which can vanish overnight.
However, what has really changed? XYZ company still exists. It is still doing business. It is likely that the company will make up the lost sales by finding new customers or selling more to existing customers, companies do this all the time. The real value of the company has changed little however the glamor of the company is in someone else's perception and subject to the whims of the investment community. Companies have become like celebrities, popular one day, ignored the next.
The same applies to housing value which is at the center of this crisis. When people who can afford their housing own property they aren't forced into selling it at bad prices. Prices go up or down but they float through the changes because they don't need to sell.
People who couldn't afford the house they bought get forced out. Since they can't be picky about the price they get, or the bank forecloses on them the house is sold for less than it's original value. When this happens rarely, someone gets a good deal on a house and that's it. When it happens frequently because poor lending practices have been institutionalized by the federal government it starts to depress all house prices. People that are buying see that many houses that used to sell for $400,000 are now selling for $340,000 and that is all they will pay. Now everyone's $400,000 house is only worth $340,000. If you need to sell you have "lost" $60,000. What changed? Your house is still the same, same rooms, same location, same climate. The only thing that has changed is the buyer's opinion of your house's value.
So where did the money go? It wasn't real to begin with. Until the money makes your fingers green it isn't real.
This is the "risk" in investments today. Hoping you call sell before the glamor fades. Hollywood investments.