No. of Recommendations: 2
db (phd),

I love fan mail, especially such flattering, enthusiastic comments as yours. Yes, I'm well-educated (thanks to having grown up poor enough to have received public monies to attend good schools), but not smart, merely working very hard, trying to understand this stuff.

Too often we think we understand the investing terms and phrases we use, such as "the transfer of wealth from weak hands to strong ones", but, when pressed to provide examples or to explain its mechanisms, our understanding becomes like the opening page of Dickens' Bleak House with the fog and mud of our opinions obscuring all. That's why I spun out that story of Sunshine Mining, to test my understanding. But against it needs to be set the arguments upatnite is laying out as to where that $8 trillion really went. If Gates didn't sell his shares and the price of his stock declines, then, yes, value vanished into thin air, with no one else capturing it, like the echoing, reverberating cries of the loons that enchanted Thoreau.

But if trades are done, then, I'd argue, the term does apply, and if one were to go back and review the trades that happened from 9/99 to 9/01 and match traders-and-dollars to pockets-filled-or-emptied, one would see a pattern of transfer from those who bought high (weak) to those that sold short (strong). So, in lamenting the decline of the market, at least two groups need to be distinguished: those whose estimated (aka, phantom wealth) was diminished and those whose real wealth (dollars spent that weren't recaptured, for stocks being sold at lower prices than they were bought.)

Both parties feel poorer, but only the latter are truly worse off, not that absolute income is the only important economic determinant of well-being, as Frank H. Robert argues in his Berkeley lecture, "Does Growing Inequality Harm the Middle Class?" [use Google to locate the text]. In fact, I'd argued that they are multiply poorer, for being at further disadvantage of the over-classes who had the wherewithal to have sidestepped much of the crash, as opposed to the "middle class" DIY'ers of 401k ilk, which is why I hammer on avoiding unacceptably large losses in the first place. Losses are arithmetic, but one's recovery rate has to be geometric, and investors dig themselves into a hole they can't get out of, financially and psychologically, so that they give up on markets altogether for longer than is in their best interests, as another poster suggests.

I understand the point you're making, but it seems more work than I care to do.

Yes, theory needs to be distinguished from practice and I'll admit upfront that I use this forum to explore ideas, just as I use markets to test them. So what I say or do should have no bearing on what anyone does about their own choices. If your investments match who you are as a person, then you are doing exactly the right thing.

Where a lot of investors failed themselves recently is in letting themselves get sucked into a game beyond their interests, abilities, and skills. They won a couple of easy hands in the go-go days and thought they were investing geniuses. But when they were dealt different cards, they didn't know what to do and froze like deer in the headlights. Rather than reversing and either stepping aside or going short, they held all the way to the bottom and then sold in disgust, which brings us back to the point where this discussion of weak hands/strong hands began. What happened then will happen again. Markets go up and down, and the rewards go those whose know its history and who plan their activities accordingly.

Charlie, NCNE [no certificates, no education, to borrow a handle that isn't really accurate, but telling nonetheless]
Print the post  


When Life Gives You Lemons
We all have had hardships and made poor decisions. The important thing is how we respond and grow. Read the story of a Fool who started from nothing, and looks to gain everything.
Contact Us
Contact Customer Service and other Fool departments here.
Work for Fools?
Winner of the Washingtonian great places to work, and Glassdoor #1 Company to Work For 2015! Have access to all of TMF's online and email products for FREE, and be paid for your contributions to TMF! Click the link and start your Fool career.