World’s Billionaires Lose $1 Trillion in Stock Market in 2019
A billion dollars sure isn’t what it used to be, and the difference is more than just how money gets devalued by inflation. A billion in stock is nothing like a billion in cash.
2018 was not a banner year for stocks by any means, even though U.S. stock markets didn’t really have all that bad of a year, and nothing like we see when we are actually in a bear market. We did see quite a bit of volatility since January 2018, but we include the 2019 results so far, we’re actually trading higher than we did when 2018 began.
Some other stock markets didn’t fare so well though, with Tokyo’s Nikkei for instance taking a big hit and giving back 43% during the year. That’s not just a bear year, it’s a pretty big one indeed. The last time the U.S. stock markets declined by 40% or more was all the way back in 1930, during the famous crash, and that was only a little bigger at 47%.
Other indexes around the world spilled a good amount of red ink last year as well, and this all has a real impact on how we track how much money people have, including billionaires. The concept of billionaire is a standard embraced around the world, even though most billionaires do not hold their assets in U.S. dollars. We do need to settle on a given currency and a given amount of it that would indicate tremendous wealth, and a billion U.S. dollars is this standard.
There are a number of ways that we can compare wealth across the ages, and we really can’t just look at the nominal wealth of someone like John D. Rockefeller a century ago, at a time when he became the world’s first billionaire, to a billionaire today. When we level the playing field by getting rid of inflation, Mr. Rockefeller actually dwarfs any billionaire of today.
We’re seeing more and more billionaires over time because it becomes easier and easier to become one, not that it is really that easy. You don’t have to control the world’s oil from well to tank like you did at the turn of the 20th Century, nor spend decades building up a business. Some get a good idea and it gets out there and a billion dollars or more can be created in a very short period of time in the Information Age.
When we see billionaires collectively give back a trillion dollars to the stock market, as is believed to happen in 2018, that does seem like a lot of money, and it is, but given that world stock markets can have significantly worse years than this, there’s the potential for bigger numbers than this.
The Way We Measure Stock Market Wealth Isn’t That Realistic
We can’t really compare losses in mark-to-market stock positions with the deterioration of other forms of wealth, for instance someone with a privately-owned business seeing business losses of the similar magnitude that you can see with losses with publicly traded shares.
Privately held shares depend on the value of the business, and if the business is worth $20 billion and you own half, your stake is valued at $10 billion. While selling off your stake in a company this size may be difficult, in other words your wealth may be fairly illiquid, we can presume that the fair market value for it would be pretty close to this $10 billion if you can sell it.
Public share valuations are much more of a fiction though, because the price of shares is not derived from a calculation of the value of the companies in any real sense, but instead, on how much was paid for the stock the last time it traded. This is called mark-to-market because we take this one number and assume that each share is worth this much, even though it may only have involved a trade of 100 shares.
If you own 100 million shares of a public company and they are worth $100 each, in other words the last trade was $100, you also can be seen as owning a $10 billion stake in it. Your business can be doing fine and even growing at a good rate but you can see a lot of this assumed value disappear through stock traders simply not being willing to pay this much anymore.
This can occur from anything from your business not growing fast enough for them, people just taking money out of the company to use for other purposes such as retirement, or a myriad of other reasons which don’t really affect your company that much but sure can affect the last traded price.
You might think that your company is doing better, and it very well may be, but these moves by the market can wipe out a good amount of your wealth. This is one of the prices of holding your assets in publicly traded companies, and while there are a lot of advantages, and you can make a lot more money this way, we also need to account for the fact that a lot of these extra gains may not be very durable if you are holding huge amounts of stock.
There’s also the matter of liquidity, and while we may think that, for instance, Jeff Bezos’ stake in Amazon appears to be quite liquid, much more so than holding assets privately, this is actually an illusion. The last trader may have paid $100 for a share in our company, but if we try to sell our 100 million shares, it is not going to be anywhere near as easy as clicking our mouse, and far from it.
Selling Huge Amounts of Stock Can Be Very Difficult and Costly
Some people out there may pay $95 for it, some may settle for $90 a share, and as we continue to massively flood the market with our stock, we’re going to end up selling it for far less than this $100 a share some guy paid for it yesterday.
We may really take our time and plan on gradually selling off our stake, but all of our selling adds downward pressure to the supply and demand dynamic that drives stock prices, and there’s no real way that this would not have a huge impact on what we get back, or what the stock would be worth mark-to-market had we not sold off.
The only real way to come out of this without a big haircut is to sell off huge chunks of the business at once, the entire thing perhaps, and this is what very large shareholders tend to do, offering up your company to your much larger competitor at what both parties decide is a fair price. In this case, you’re only dealing with one buyer, not the countless ones in the market who will indeed gang up on you if you try to do the same thing.
We are right back to where the billionaire who owns a business privately is, and there really isn’t all that much of a distinction between the two as far as liquidity goes when it comes to cashing in it all, even though companies cite this as a main reason to go public. There are other reasons to do this, but liquidity isn’t really one of the bigger ones.
This loss of the trillion dollars by billionaires last year collectively therefore overstates things, and is more like people out there don’t like your stock as much as they used to, but you couldn’t sell it to them for that price or anything that close anyway. This happens the other way as well, and in good market years trillions are added, but this is not anything like money in the bank.
Those of us of much more modest means can actually use mark-to-market fairly reliably though, and although selling stock does involve what we call slippage, the difference between the offer for a smaller number of shares and what we end up getting for a larger sale. If we are only selling 10,000 shares, we should at least come close to the last traded price even if we sell all our shares at once.
Billionaires who hold their wealth in stocks can’t really do this, and while the amount of envy toward these people can be substantial, there’s one thing that we have them beat at, the fact that our wealth is often considerably more real and durable.
Aside from this perhaps making us feel better, there are some real practical benefits to everyday investors, as our holdings are considerably more liquid than those who trade in much larger amounts, billionaires for instance, or billionaire funds. We might not have the size, but sometimes, smaller and nimbler is a lot better.
Editor, MarketReview.com
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