When markets collapse, we hear of the loss of billions in value.
Just like during good times when markets rise, people feel good because they feel they are extremely rich.
The funny thing is this - that the value of any class of assets is measured by the last market traded price of probably one unit of that asset class.
It is by simple extrapolation of that last market price to the entire asset class that has not been sold that value is measured - what they call market capitalisation.
Market capitalisation is a theoretical concept that has no representation in real life. You cannot eat market capitalisation. You can only eat the last assets that you have sold for cash that you can use the cash to consume. The assets that you hold of which you imagine to be worth so very much because of the price that is currently going on in the market is a fool's paradise.
Of course, it is better to have assets in your hands than no assets at all - because at least at the end of the day, when need be, you have something to sell for cash.
My point is to discourage people from imagining how wild rich they are when in fact they are holding onto to something durable or tangible which carries some value in the future (before of their durability), of which we have no clue what it will be when we need to sell the asset.
It is for this reason that people with extra money need to work hard and pay attention to markets so that they can ensure that the assets that they are holding hold the value that they desire.
There is no guarantee to the value of their assets - because the value is dependent on market conditions.
This is the great disaster story about saving for retirement by entire populations. But that is another story.
1 comment:
Discounting the poor gypsy with her crystal ball, the cashable market currency is information.
Who knows first and who has the capital scale can move the market. It is when a market moves that at each touch-point of time, players can win if prepared or lose if taken by surprise.
Sometimes they play the eight - shares, bonds, derivatives, currencies, rare metals, crypto, commodities, property - in such a diversified way gains can be magnified if on a winning streak, and if on a losing streak, losses can be minimized, for example by playing currencies in tandem with shares.
The player comforts himself with the assumption the market will only be superficially rational in the sense everyone wants to quickly accumulate an edge so as to be the first to squeeze the largest mean returns and/or smallest returns variance.
This assumption is however counterbalanced by the conclusion that modern portfolio theory applied to capital asset pricing models even down to things like stochastic uncertainty indices is inherently oversimplified.
Lately, market complications have arisen with greater stridency. Natural disasters, malnutrition, epidemics, wars, geopolitics, even the role of AI in informational metaverses, abound.
Given such challenges as they arise, outcomes will be unwise for everyone when policymakers persist in not wanting to see eye to eye on how to reduce geopolitical tensions so as to converge more critical-mass resources to solve the other challenges.
For some, and despite global integrations, not wanting to cooperate to find common solutions to bilateral problems is just kicking the can down the road whose problems will only become too big for later generations to solve; an own goal, in fact.
As it is, too many present-day politicians play to their own imagined galleries when making policies affecting other nations and there is no shortage of hangers-on who stroke and pander to their embarrasingly narcissistic tendencies. Eye to eye has become eye for eye. Soon everyone becomes blind. But, first, after being blinkered.
Given such a fait accompli, it is no wonder even sovereign funds can get adrift let alone the young and old who continue to husband their small but evanescent hopes of a small token return for their bets, at best based on their barnyard monte carlo simulations.
Perhaps that's why it has oft been said we know all about prices but so little about value. Could it be that there's some voice waiting to be heard that says 'stop the disintermediation and leveraging, start the stoicism'? Some will however say that's sheer cowardice about life.
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