When asset prices go down, does the value evaporate?

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Gracie77
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When asset prices go down, does the value evaporate?

Post by Gracie77 »

Hello! I was watching a YouTube show called "What are your thoughts," episode "Bonfire of the Billionaires." The hosts are Josh Brown and Michael Batnick:
https://youtu.be/xLDImaAyvqc
I find these guys very entertaining. During the first 15 minutes they were arguing about what happens when asset prices go down. The main argument starts at about 08:30; however, it's worth listening to the first 8 minutes, because it gives some context. In the beginning, Josh seemed to be arguing that some assets aren't actually worth what the seem to be worth on paper. Then he argues that when asset prices go down, that gap in value has to go somewhere, like, to cash. Michael is arguing that it's not one to one and at least some value evaporates. Then Michael said he needed someone smarter to come on and explain to Josh why he is wrong.
Does anyone know some facts about what actually happens to the money when asset prices crash?
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Re: When asset prices go down, does the value evaporate?

Post by Parkinglotracer »

It’s like trading baseball cards with your friends when you were little. Your investments are worth what someone will trade for them. You paid a dollar; you sold it for 5, you pocketed 4 dollars of cash. Visa versa - you paid 5 dollars and sold it for $1 you lost $4 of your money. If your cards get wet and are worthless, Any potential gains or losses on your cards have evaporated into the universe. Whatever you thought, hoped, wished, expected the value of that babe Ruth card was doesn’t really matter today as it’s gone. Those were paper gains and paper losses. That Is how I think of it.

Stocks are valued at their last trade. Let’s say twitter traded at 32 dollars a share. So that it it’s market value at this second. Elon gets a wild hair and bids 54.20 to take twitter private ( notice the 420 in there random number generated by his weed reference of 420 - Elon likes to smoke weed) - every share Jumps immediately to what a person will pay for a share now knowing that Elon is considering buying all the shares for 54.20 - say the next trade is $46 dollars - a lot of wealth was created on paper.

Cash has not always traded hands yet in the wealth creation and destruction cycle - that is why they say you have a paper gain or loss - it’s just on paper.
The Last trade defines the fair market value.
sureshoe
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Re: When asset prices go down, does the value evaporate?

Post by sureshoe »

Gracie77 wrote: Wed May 18, 2022 2:16 am Hello! I was watching a YouTube show called "What are your thoughts," episode "Bonfire of the Billionaires." The hosts are Josh Brown and Michael Batnick:
https://youtu.be/xLDImaAyvqc
I find these guys very entertaining. During the first 15 minutes they were arguing about what happens when asset prices go down. The main argument starts at about 08:30; however, it's worth listening to the first 8 minutes, because it gives some context. In the beginning, Josh seemed to be arguing that some assets aren't actually worth what the seem to be worth on paper. Then he argues that when asset prices go down, that gap in value has to go somewhere, like, to cash. Michael is arguing that it's not one to one and at least some value evaporates. Then Michael said he needed someone smarter to come on and explain to Josh why he is wrong.
Does anyone know some facts about what actually happens to the money when asset prices crash?
Value can definitely "evaporate". If I have $100k in stocks today and tomorrow I have $80k, the $20k is gone.

The real question is "why?"

Every possession you have (stock, bond, house, Beanie Baby) has a future value and income streams that can be discounted by the risk free rate of return.

So in theory, you should be able to accurately price every stock and bond perfectly. The reason we can't is:
1) Nobody knows for sure the future value and income streams
2) Nobody knows for sure the risk free rate of return

So, when people price stocks, they take their best guess at 1 and 2. When future returns go up, prices go up. When rates go up, prices go down. Sometimes this is based on material events, often it's based on speculation.

If a company is worth $1B, but have a new discovery that will increase profits - "new value" is created. If they are sued for patent infringement, they might not be able to generate comparable cashflow - so the prices drop and "value evaporates".

As a side note - this is the main case against gold, collectibles, and other things that have no true, intrinsic value. Why would gold or beanie babies "go up"? The main value is based in the fact that someone else will pay for it rather than it generating value itself.
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JoMoney
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Re: When asset prices go down, does the value evaporate?

Post by JoMoney »

Gracie77 wrote: Wed May 18, 2022 2:16 am...what actually happens to the money when asset prices crash?
It was never "money" to begin with, you might have bought it with money, but once you've bought the asset you have the asset. The market price is always some notional "value" based on what some small fractional amount of it last traded at.
If you bought a TV with your money, you still have a TV (and not money) if the store has a sale on it next week.
The expectation of investment securities is that at some point in the (potentially distant) future they'll distribute money, but how much, and when is always in fluctuation of peoples guesses.

If you trade in derivatives that are cash settled, like options contracts, those are an exchange of money between the people playing in them. The losses in the options notional value aren't always equivalent to their market prices though, they'll often just expire worthless and the only exchange of money was what the purchaser paid for the option to begin with.
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Re: When asset prices go down, does the value evaporate?

Post by dbr »

JoMoney is right.

The value evaporates but the asset holder's money was "lost" the day the asset was purchased in the sense that all the money was exchanged to buy the asset instead. To get money back the asset has to be sold to someone who has money. Total money is neither gained nor lost in these exchanges. It is just a question of who has the money.

People who invest should keep these facts in mind. But people who have money should also remain aware that what that money can buy is changing all the time.
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Re: When asset prices go down, does the value evaporate?

Post by burritoLover »

Oh no! - not another "losses aren't real until you sell" thread.
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Re: When asset prices go down, does the value evaporate?

Post by Marseille07 »

Value absolutely evaporates. When you buy a new car, as soon as you drive off the lot, the value of your car is down.

Josh is wrong because "that gap in value has to go somewhere" is false. It doesn't go anywhere since the dealership still has your money no matter what happens to your car.
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Re: When asset prices go down, does the value evaporate?

Post by JackoC »

Marseille07 wrote: Wed May 18, 2022 8:54 am Value absolutely evaporates. When you buy a new car, as soon as you drive off the lot, the value of your car is down.

Josh is wrong because "that gap in value has to go somewhere" is false. It doesn't go anywhere since the dealership still has your money no matter what happens to your car.
I agree value evaporates. One key to understanding this I think is to realize 'money' has more than one equally valid meaning. It has three:
1. unit of account
2. means of exchange
3. store of value

In case of declining asset prices we're speaking of $'s as a unit of account, not physical or electronic cash as a store of value. The only reasonable way to measure the value of traded securities is by the current market clearing price in $ (for somebody who'll mainly spend $, not EUR, JPY etc on consumption), even though you (and most other holders) haven't sold anything. Saying the value of the stocks is always what you paid for them is silly, nobody does it when the current market price is many times higher than the purchase price. It's beyond silly to pick some recent market value and say that's what they are still worth (a recent high determined by the marginal trade in the market is a 'real' value but a current lower price determined exactly the same way isn't: clear contradiction).

It follows directly from that if the total value of stocks at the current market clearing price is $X trillion lower than it was some months ago, the $X trillion evaporated. There's nothing remotely strange about this. Say I have a used car in good condition on which I've gotten a real bid at $10k. It's an older used car so I have only liability insurance on it. Next day I come out and somebody smashed into it and left a note saying 'sorry' with no name or address. What's strange about concluding several $k of value has evaporated? Why would I ask: 'where did that money go'? I figure most people here who get hung up on this issue with stocks would be able to understand that case. I have to figure it's a psychological thing caused by the greater import of people's financial assets, and their liquidity: if you admit value evaporated, the little irrational being perched on one shoulder will torment you (why didn't you sell before this?, you could have done so in an instant!) even though the little rational being on the other shoulder tells you the truth: you're unlikely to come out ahead trying to guess downturns and sell in advance of them. Maybe that's less likely with things that are harder to sell, and probably less with things where the evaporated amount is less painful. Just looking for an explanation why something so obvious ('when market prices of financial assets go down does value just evaporate?' yes) is the subject of so many 'debates' here.
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Re: When asset prices go down, does the value evaporate?

Post by lostcoast »

People believe when the value of an asset goes up, say your house and all other houses where ever, that someone put up cold hard cash to back up that rise on all houses. It just isn't so, the rise in value was set by the last buyer inflating the value of one house by agreeing to pay the new price in cold hard cash and a loan or whatever. Now, when everyone decides this is just too good to pass up on this new valuation and goes to sell, boom! the price does not hold up. Too many sellers and not enough buyers, hence the price is not sustainable and that 'money' is gone, but where? It was never there in the first place and that is the basis of fiat currency.
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Re: When asset prices go down, does the value evaporate?

Post by mrspock »

JoMoney wrote: Wed May 18, 2022 8:39 am
Gracie77 wrote: Wed May 18, 2022 2:16 am...what actually happens to the money when asset prices crash?
It was never "money" to begin with, you might have bought it with money, but once you've bought the asset you have the asset. The market price is always some notional "value" based on what some small fractional amount of it last traded at.
If you bought a TV with your money, you still have a TV (and not money) if the store has a sale on it next week.
The expectation of investment securities is that at some point in the (potentially distant) future they'll distribute money, but how much, and when is always in fluctuation of peoples guesses.

If you trade in derivatives that are cash settled, like options contracts, those are an exchange of money between the people playing in them. The losses in the options notional value aren't always equivalent to their market prices though, they'll often just expire worthless and the only exchange of money was what the purchaser paid for the option to begin with.
This. Some people with their previously $2T ”tulips” are learning this lesson.

Imagine if I have 20 identical granite rocks. I picked them up off the ground — they are — rationally — nearly worthless. I managed to convince a handful of people they aren’t, they are worth $100k each, because I say they are special magical rocks which bring good luck. I manage to sell 5 of them for $500k, we will call this an established “market”. Do I now have $2m in “assets”? Let’s find out. A couple days go buy, and 2 of my magical rock owners slip and fall, hurting themselves badly. They blame the rocks, word gets out… suddenly nobody wants to buy my rocks.

I now have $500k and 15 worthless rocks. Where did the other $1.5m go? Nowhere…. I never had it in the first place.

Now replace the rock with the latest “tulip” fad, and you understand what is going to happen… what is happening.
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Re: When asset prices go down, does the value evaporate?

Post by jebmke »

It evaporates; but it is like a still. The good stuff condenses back and the bad stuff disappears. Asset destruction is part of the process.
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Re: When asset prices go down, does the value evaporate?

Post by Oicuryy »

Gracie77 wrote: Wed May 18, 2022 2:16 am When asset prices go down, does the value evaporate?
It's the other way around. When the value of assets evaporates, prices go down.

Value, like beauty, is in the eye of the beholder. People can change their opinion of what something is worth. When they do, the price changes.

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Re: When asset prices go down, does the value evaporate?

Post by Call_Me_Op »

Value can just evaporate. Simple example is a publicly-traded company that is focusing on a single drug and runs a trial that shows that the drug is useless. Overnight, a share of that company becomes worth much less. No shares even have to change has for this to happen.
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Gracie77
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Re: When asset prices go down, does the value evaporate?

Post by Gracie77 »

Thanks for all of the responses.!
sureshoe wrote: Wed May 18, 2022 8:29 am So in theory, you should be able to accurately price every stock and bond perfectly. The reason we can't is:
1) Nobody knows for sure the future value and income streams
2) Nobody knows for sure the risk free rate of return

So, when people price stocks, they take their best guess at 1 and 2. When future returns go up, prices go up. When rates go up, prices go down. Sometimes this is based on material events, often it's based on speculation.
When you say it that way I can understand why a lot of people aren't interested in buying stocks. You have to trust that the guy selling it to you isn't crazy and/or corrupt, because you really have no way of knowing if you are paying what it is worth.
Oicuryy wrote: Wed May 18, 2022 10:32 am
Gracie77 wrote: Wed May 18, 2022 2:16 am When asset prices go down, does the value evaporate?
It's the other way around. When the value of assets evaporates, prices go down.

Value, like beauty, is in the eye of the beholder. People can change their opinion of what something is worth. When they do, the price changes.

Ron
Ok, it does seem a little obvious that value can and does really evaporate and the best thing is to buy and hold diverse assets over time and know that any asset can be susceptible to temporary extreme mis-valuation. It's a good reminder to keep things as simple as possible..
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Re: When asset prices go down, does the value evaporate?

Post by sureshoe »

Gracie77 wrote: Thu May 19, 2022 2:01 am
sureshoe wrote: Wed May 18, 2022 8:29 am So in theory, you should be able to accurately price every stock and bond perfectly. The reason we can't is:
1) Nobody knows for sure the future value and income streams
2) Nobody knows for sure the risk free rate of return

So, when people price stocks, they take their best guess at 1 and 2. When future returns go up, prices go up. When rates go up, prices go down. Sometimes this is based on material events, often it's based on speculation.
When you say it that way I can understand why a lot of people aren't interested in buying stocks. You have to trust that the guy selling it to you isn't crazy and/or corrupt, because you really have no way of knowing if you are paying what it is worth.
This is really the case for not buying INDIVIDUAL stocks. There is just no way to know the future, and for all the people who claim to be able to pick stocks - they are wholly incapable of predicting #1 and #2 beyond guessing at trends.

By buying large, simple diversified funds, you spread the risk. The evidence suggests returns will continue to increase, which hopefully exerts upward pressure. Right now is also unique in that the risk free rate of return appears to be increasing, which exerts downward pressure on prices.
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Re: When asset prices go down, does the value evaporate?

Post by sureshoe »

Oicuryy wrote: Wed May 18, 2022 10:32 am
Gracie77 wrote: Wed May 18, 2022 2:16 am When asset prices go down, does the value evaporate?
It's the other way around. When the value of assets evaporates, prices go down.

Value, like beauty, is in the eye of the beholder. People can change their opinion of what something is worth. When they do, the price changes.
That is a better way of saying it really. The price is a reflection of the future value. As the expected future value decreases, the price goes down.
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Re: When asset prices go down, does the value evaporate?

Post by Tellurius »

sureshoe wrote: Wed May 18, 2022 8:29 am
Gracie77 wrote: Wed May 18, 2022 2:16 am Hello! I was watching a YouTube show called "What are your thoughts," episode "Bonfire of the Billionaires." The hosts are Josh Brown and Michael Batnick:
https://youtu.be/xLDImaAyvqc
I find these guys very entertaining. During the first 15 minutes they were arguing about what happens when asset prices go down. The main argument starts at about 08:30; however, it's worth listening to the first 8 minutes, because it gives some context. In the beginning, Josh seemed to be arguing that some assets aren't actually worth what the seem to be worth on paper. Then he argues that when asset prices go down, that gap in value has to go somewhere, like, to cash. Michael is arguing that it's not one to one and at least some value evaporates. Then Michael said he needed someone smarter to come on and explain to Josh why he is wrong.
Does anyone know some facts about what actually happens to the money when asset prices crash?
Value can definitely "evaporate". If I have $100k in stocks today and tomorrow I have $80k, the $20k is gone.

The real question is "why?"

Every possession you have (stock, bond, house, Beanie Baby) has a future value and income streams that can be discounted by the risk free rate of return.

So in theory, you should be able to accurately price every stock and bond perfectly. The reason we can't is:
1) Nobody knows for sure the future value and income streams
2) Nobody knows for sure the risk free rate of return

So, when people price stocks, they take their best guess at 1 and 2. When future returns go up, prices go up. When rates go up, prices go down. Sometimes this is based on material events, often it's based on speculation.

If a company is worth $1B, but have a new discovery that will increase profits - "new value" is created. If they are sued for patent infringement, they might not be able to generate comparable cashflow - so the prices drop and "value evaporates".

As a side note - this is the main case against gold, collectibles, and other things that have no true, intrinsic value. Why would gold or beanie babies "go up"? The main value is based in the fact that someone else will pay for it rather than it generating value itself.
The question is what the meaning of “have” is.

Liquidity can’t be had by all stock owners at the same time without large price swings, except in the Musk case of a bid for the whole company.

Price is backward-looking, as they said, it depends on the last trade. Value is forwarding-looking and can never be certain, only guessed based on the last price.
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Re: When asset prices go down, does the value evaporate?

Post by dbr »

The guy selling the stock to you is not corrupt for the most part though there may be corporate managements in any given case that are corrupt, for example Enron. This assumes you don't have someone managing your assets that is engaging in a Ponzi scheme or something, but schemes have nothing to do with the stock market per se.

As to whether you, the other guy, and everyone else in the market is crazy, that could indeed by true. At least for a fact irrational thinking, fear, and greed are factors in the market.

You can look at the historical record to appreciate how irrational the market does or does not appear to be.
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Re: When asset prices go down, does the value evaporate?

Post by Gracie77 »

sureshoe wrote: Thu May 19, 2022 9:05 am
Gracie77 wrote: Thu May 19, 2022 2:01 am
sureshoe wrote: Wed May 18, 2022 8:29 am So in theory, you should be able to accurately price every stock and bond perfectly. The reason we can't is:
1) Nobody knows for sure the future value and income streams
2) Nobody knows for sure the risk free rate of return

So, when people price stocks, they take their best guess at 1 and 2. When future returns go up, prices go up. When rates go up, prices go down. Sometimes this is based on material events, often it's based on speculation.
When you say it that way I can understand why a lot of people aren't interested in buying stocks. You have to trust that the guy selling it to you isn't crazy and/or corrupt, because you really have no way of knowing if you are paying what it is worth.
This is really the case for not buying INDIVIDUAL stocks. There is just no way to know the future, and for all the people who claim to be able to pick stocks - they are wholly incapable of predicting #1 and #2 beyond guessing at trends.

By buying large, simple diversified funds, you spread the risk. The evidence suggests returns will continue to increase, which hopefully exerts upward pressure. Right now is also unique in that the risk free rate of return appears to be increasing, which exerts downward pressure on prices.
Totally agree! A lot of people think investing IS buying individual stocks or special funds. The interesting thing in retrospect is that while some stocks were going up like crazy the last couple of years, some thought indexing was dumb or pitiful, because everything seemed obvious, a "no-brainer". Now it's easy to see that nobody actually knows and the important thing is that you can stick with what you bought. I'm just so lucky that I read Jack Bogle's book when I did.
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Re: When asset prices go down, does the value evaporate?

Post by Gracie77 »

dbr wrote: Thu May 19, 2022 9:19 am The guy selling the stock to you is not corrupt for the most part though there may be corporate managements in any given case that are corrupt, for example Enron. This assumes you don't have someone managing your assets that is engaging in a Ponzi scheme or something, but schemes have nothing to do with the stock market per se.

As to whether you, the other guy, and everyone else in the market is crazy, that could indeed by true. At least for a fact irrational thinking, fear, and greed are factors in the market.

You can look at the historical record to appreciate how irrational the market does or does not appear to be.
I know some people that bought some "alternative assets" in the last couple of years. They really looked like geniuses! I think the importance of a regulated market, where corruption is kept in check, was not appreciated to the extent that it should be.
But definitely, the market is at least as rational or irrational as its participants.
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Re: When asset prices go down, does the value evaporate?

Post by JackoC »

lostcoast wrote: Wed May 18, 2022 9:37 am People believe when the value of an asset goes up, say your house and all other houses where ever, that someone put up cold hard cash to back up that rise on all houses. It just isn't so, the rise in value was set by the last buyer inflating the value of one house by agreeing to pay the new price in cold hard cash and a loan or whatever. Now, when everyone decides this is just too good to pass up on this new valuation and goes to sell, boom! the price does not hold up. Too many sellers and not enough buyers, hence the price is not sustainable and that 'money' is gone, but where? It was never there in the first place and that is the basis of fiat currency.
Generally true but would be and for eons was also true with specie currency, speaking of the value of financial risk assets like stocks. The total value of stocks, bonds, real estate etc at market clearing prices as measured in (more or less) gold backed USD as a *unit of account* in 1890 had no specific relationship to the number of $'s in existence as cash, a *store of value*. The money is never 'there in the first place' when confusing those two things: 'money' as a store of value (cash balances); vs. 'money' in the alternative equally valid meaning 'unit of account to measure value' (of things *other than* cash).

I really think this is key to various slight or more significant misunderstandings of this issue. We're measuring stock value in units of USD (even foreign stocks we hold, whereas an EUR investor say would measure US stocks in EUR) as a convenient substitute for what we're actually interested in: how much goods/services can we convert the stocks into, now or later (somebody will if not us, eventually). Expressing it in USD avoids us all having to agree what the relevant basket of goods/services would be, and OTOH each of us has a reasonable idea what our basket costs in USD. That's all that's going on, it's not directly* related to how the (cash) monetary system works, as well as not a matter of mysterious cash balances somewhere directly tied to our stock portfolio's.

*indirectly, changes in how many USD it takes to buy various people's baskets or a common standard basket (such as CPI) over time feeds back into stock returns though in a variable way that's hard to separate from all other changing facts affecting stock values. But in this moment we express the value of the SPY ETF say in $'s basically because it's more convenient to do that than first have to agree what basket of goods/services we'd all like to express the value in terms of.
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Re: When asset prices go down, does the value evaporate?

Post by 1789 »

Marseille07 wrote: Wed May 18, 2022 8:54 am Value absolutely evaporates. When you buy a new car, as soon as you drive off the lot, the value of your car is down.

Josh is wrong because "that gap in value has to go somewhere" is false. It doesn't go anywhere since the dealership still has your money no matter what happens to your car.
Josh looked pretty confused about this. Michael was right.
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Re: When asset prices go down, does the value evaporate?

Post by Marseille07 »

1789 wrote: Thu May 19, 2022 11:43 am
Marseille07 wrote: Wed May 18, 2022 8:54 am Value absolutely evaporates. When you buy a new car, as soon as you drive off the lot, the value of your car is down.

Josh is wrong because "that gap in value has to go somewhere" is false. It doesn't go anywhere since the dealership still has your money no matter what happens to your car.
Josh looked pretty confused about this. Michael was right.
I didn't watch the video, but the simple idea is that the gap in value doesn't go anywhere, it already went to the dealership in the form of your car payment.

The value of your car is detached from your payment going forward, that's all. And this applies to stocks as well.
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