Tech billionaires lost $400 billion this year. Where does it go? Does anyone gain?
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No one gained it, its just “on paper”. It works as the same principle as a house. My house when I brought it was 280k, it peaked at 500k so technically on paper I gained 220k. Now it dropped to about 420k and I lost on paper 80k. No one gained the 80k I lost.
They didn’t actually lose it. The more accurate way to say it is “the current market value of their assets decreased” by $400 billion. It’s called an unrealized loss.
If they sold their assets at the deflated vale it would become a realized loss.
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The valuation is primarily founded on expected future earnings. That is, if people predict that a company will earn lots of money in the future, then its current value right now goes up because people want a share of those future earnings.
Importantly, future money is also a gamble in some ways, because it’s uncertain. If a company has a 50% chance of giving $200, but a 50% chance of giving $50 next year, then it’s worth an average of $125 next year (risk averse people might discount it further because they don’t like risky gambles).
So, if you think a company has the above 50-50 shot, then you would value the company at $125, and buy stock for that much. If you knew for sure it would grow, you’d buy it at $200. If you knew for sure it would shrink, you’d only buy at $50. But if you’re unsure then $125 is a reasonable price. If, after buying, more information comes out that it’s actually going to be unlucky and be $50, then suddenly the value of your stock will drop from $125 to $50. What happened, where did the value go?
From a certain perspective, it was never there to begin with. In some sense the company was always destined to be worth $50 next year and your valuation of $125 was incorrect based on imperfect information. It was always truly worth $50 and you simply overestimated it.
From this perspective, the investor lost $75, which was gained by whoever sold them the overpriced stock, because they sold stock which was truly worth $50 for the price of $125, and got out of the market before the truth was discovered.
From another perspective, maybe the company truly has a real possibility of being worth $50 or $200, and even though your information is imperfect, it’s not random, it’s based on decisions made by the company and the economy overall. There is a possible future in which it is worth $200 next year because it genuinely produces and sells $200 worth of goods, and another future in which it makes poor decisions and only produces and sells $50 worth of goods. If the government makes some sort of regulation that cripples the business, or the CEO botches a decision, or some competitor springs up and outcompetes them, then they lose the lucrative future and gain the poor future. From this perspective then, potential value is being destroyed in the future. That is, they had $200 worth of opportunity and they lost it. Value that people thought would be created was not. If somebody creates a virus that will inevitably kill all the corn plants five months from now, the valuation of farms will plummet in anticipation of the lost value that was supposed to be created but will instead be destroyed, despite the fact that it hasn’t physically been destroyed yet.
Tech is a growing industry. People expect it to make even more money in the future than it is now, and anything that changes those expectations will change current valuations immediately, because people are planning for the future and pricing it into their investments ahead of time. Investors lost $400 billion of potential value because we used to think the stuff they had was going to be super valuable and now we think it will be only somewhat valuable.
There is no money that goes anywhere.
Imagine you have a rare comic book and I tell you I’d pay you $100 for it, you turn me down. A week later, you need money to buy your mom a birthday present and ask if I want to buy it. But now, I only offer you $80 and you begrudgingly take it. There is no $20 of yours that went anywhere — I was only willing to pay less for something you have.
Nobody gained anything and nobody really lost anything: the money was all theoretical so it never really existed. They owned x number of shares of a company which they could have sold for a certain price in 2021 if they wanted to. They would not be able to sell those shares at the same price now, so their “net worth” is lower. But it’s all moot, nobody was really going to sell all those shares and it would be a nightmare to even try.
TL:DR – it’s all stock market money which is made up anyways. Nobody ever had this money in their bank accounts.
It’s the possible money that could be made.
If you own an item which is $5 now, in the future increases by $10, and the value becomes $15, did you get handed a 10 dollar bill? No.
Say the item now goes down to $3
You didn’t get any money taken directly out of you, but you LOST what could’ve been taken advantage of.
Imagine you have a Spiderman Comic. Not even a really rare one. Just a regular old Spiderman comic. It’s worth $1.
Then an interview surfaces where Stan Lee says that’s his very favourite issue of Spiderman ever. Now it’s worth $100.
Then you find out your copy is signed by Stan Lee himself. Now it’s worth $1000.
Then it comes to light he signed ten copies of this one comic. A guy in Sweden owns the other nine. Now yours is worth $5000.
Then the guy in Sweden says that all of his copies burned in a fire. Now it’s worth $10,000.
But then the guy is caught selling five copies of the comic. Turns out he made up the story to drive the price up. Yours is worth $5,000 again.
Then it turns out they weren’t signed by hand, but with a stamp. Now it’s worth $2,000. Then it turns out there’s actually hundreds of them. Now its worth $500.
Then a story emerges that Stan Lee didn’t draw any comics, or write anything, that it was all lies and self-promotion, and also he was secretly a communist and a spy for the Swedes. Every hates Stan Lee and all twenty-eight Spiderman movies currently in production are cancelled.
Now it’s worth $1 again.
In all cases, your actual possessions haven’t changed, but your net worth has been all over the place.
Expanded to a grand scale, that’s basically how the stock market works.
The “lost money” was the value of their shares in companies. Shares are “worth” what somebody is willing to pay for them so their “loss” is what they would get for selling them now versus what they would have got for selling them twelve months ago.
Nobody has gained at the moment but buyers WOULD “gain” if these shares were to be sold now, as they’d be cheaper than they used to be. It’s unlikely, though, that these shares will become available as rich people tend not to sell at the bottom of the market.
Think of it like a super rare pokemon card of Charizard. That’s valued at 1 Billion. Later on people care less about pokemon cards though so the value decreases. What they lost was the value of an asset.
This can be bad for the pokemon merchandise market though as people are less interested they buy less cards and other goods.
Later the popularity could go up again and the value of Charizard could go back up.
If they ever sell the card then thats when the price is actualized.
But in practice no company can pay a trillion dollars to buy a large company like amazon. But those companies make tons of profit over their lifetime which is why they are valued so high.
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