I feel like the way this is phrased encourages the common misconception of “the market” as a big bucket of cash that you can put some into or take some back out of (with the result of there then being a larger/smaller quantity of cash stored in the bucket) rather than every transaction necessarily involving equal quantities of both. It’s a truism/tautology that you can’t have more cash flowing in than is flowing out (or vice versa); it’s the same cash going both ways from one person to another.
“More buyers than sellers” should properly be understood as the buyers feeling a greater sense of urgency, becoming willing to accept less favourable terms (from their perspective, meaning higher prices), and those prices attracting more sellers at a new and higher-priced equilibrium. The total quantity of cash in vs cash out still has to match in the end.
The only bucket of cash involved is the underlying company that the stock represents ownership of—and the cash from stock-market trading doesn’t directly interact with that bucket unless they’re issuing/offering more stock. We’re all just haggling among ourselves over the price of a slice of the pie. Facebook doing a bad job of being Facebook makes the pie (their expected future profits) look smaller and shittier… so, I am going to say that’s relevant.
Heck, even if there is a big rush of Facebook shares being sold that drives the price down, if that’s only happening because some major shareholder let their cat play with their phone while the brokerage app was open (with no underlying reason to think Facebook is worth less than previously), it theoretically ought to be a passing thing rather than a permanent loss of cash from the bucket. The rest of us can watch it happen with mild bemusement, buy the shares they’re selling at a steep discount, then look around and say “phew, guess that’s over, same price as last week?” and have it go back to the previous price level without us needing to collectively find a replacement quantity of cash to put back in the bucket.
Also would like clarification here: “have it go back to the previous price level without us needing to collectively find a replacement quantity of cash to put back in the bucket.”
You don’t need a replacement quantity of cash, but you do need a (replacement?) quantity of eager buyers. Value does in fact need to be replaced.
Otherwise, neither Facebook nor GameStop’s stocks will ever go back to the previous price level (and we can be nitpicky and say well, if it’s part of a larger broad-market fund and everyone’s buying the fund but you still need an everyone to buy).
Would it be appropriate to rephrase my original post as follows?
(I’m sticking with the phrase “redeeming” instead of “selling” because that’s how Vanguard describes it [making it sound like a good thing rather than a bad thing].)
(I also know that “market volatility” can describe both up and down, but it’s only ever used to describe down; the point of this initial writing exercise was to describe what was literally happening when the news sites say “we’ve got a volatile market right now.”)
***
For “market volatility,” read people are redeeming their investments at a decreasing cash value, making the total potential cash value of the investment go down.
For “market growth,” read people are purchasing at an increasing cash value, making the total potential cash value of the investment go up.
For continued market growth, you need more people who want to buy at an increasing cash value and fewer people who want to sell at a decreasing cash value.
My investment protects you.
Your investment protects me.
After all, “panicked investors” can also be read as people redeeming value from the market — and if too many people decide to sell their stocks before we get a chance to request buyers, then you and I won’t get as much cash value from our investments as we were hoping to.
At least, not until more people decide that our investments are worth purchasing.
For the price to rebound, we would need there to be people willing to both buy and sell the stock at the old price. To the extent that the supply of buyers was reduced (since their desire to buy was satisfied) by a major shareholder’s cat dumping their stock, we would need to find some new buyers.
But there are people coming in/out of the market all the time—not everyone who was ever going to have an interest in Facebook stock was waiting with a bid order on the books for the cat to sell into.
Let’s say for sake of argument that the “true and actual” value of a share of Facebook stock (based on some platonic ideal analysis of the time-discounted sum of all its future dividends) is $235. Even if the cat manages to sell enough stock to temporarily punt the price down to $200, it will still be true that the sum of future dividends is $235.
There will then be a quick profit to be made by anyone noticing the discrepancy who’s willing to offer to buy at $205, who will in turn be outbid by those offering $210, or $230, or $232, or $233.50… and that’ll bring the price back into line with where it “ought” to be. There doesn’t need to be a large quantity of shares traded at those prices, because spot price is just based on the most recent trade. And if there aren’t any (non-cat) sellers willing to sell below $235 then anyone wanting to buy Facebook stock at all will need to meet their terms.
In the textbook-ideal case this would all happen almost immediately. In practice probably it would take a bit longer for the market to figure out the big sale was an irrational actor; meanwhile some people with an urgent desire to sell will have started offering at $230 or $225, so there will be a bit of churn before things settle.
Why is selling an investment at the market’s highest value point in history irrational? Because it might be at an even higher value point in history later, and by selling you practically ensure that it’ll take longer to reach the next peak?
I don’t think the price being at an all time high was a necessary, intended, or … even explicitly included part of the story I was telling. I picked the price numbers purely for purposes of illustration, by looking up the current price and rounding it—the specific number wasn’t intended to be significant.
The sale is irrational because it’s performed by a cat, who (presumably) has no useful information or analysis about the value of the company and its stock.
If the sale were being undertaken by someone intentionally, on the basis that they think Facebook isn’t worth as much as the current price implies, that would imply the existence of information that the market price should respond to.
That’s an excellent point—I knew that every buyer required a seller, and that there are (rare) situations in which you could try to sell your investments only to have the brokerage firm say “sorry, no buyers available right now.”
But even though there’s the same amount of cash going to/from buyer/seller in all unique transactions, future transactions either decline or increase in value based on whether more people are trying to buy or sell (as you noted).
So if you want your future transactions to increase in value, you want more people to want to buy than to want to sell.
This is not precisely the same thing as what I originally wrote, which means it is good to clarify my thoughts in this way.
I feel like the way this is phrased encourages the common misconception of “the market” as a big bucket of cash that you can put some into or take some back out of (with the result of there then being a larger/smaller quantity of cash stored in the bucket) rather than every transaction necessarily involving equal quantities of both. It’s a truism/tautology that you can’t have more cash flowing in than is flowing out (or vice versa); it’s the same cash going both ways from one person to another.
“More buyers than sellers” should properly be understood as the buyers feeling a greater sense of urgency, becoming willing to accept less favourable terms (from their perspective, meaning higher prices), and those prices attracting more sellers at a new and higher-priced equilibrium. The total quantity of cash in vs cash out still has to match in the end.
The only bucket of cash involved is the underlying company that the stock represents ownership of—and the cash from stock-market trading doesn’t directly interact with that bucket unless they’re issuing/offering more stock. We’re all just haggling among ourselves over the price of a slice of the pie. Facebook doing a bad job of being Facebook makes the pie (their expected future profits) look smaller and shittier… so, I am going to say that’s relevant.
Heck, even if there is a big rush of Facebook shares being sold that drives the price down, if that’s only happening because some major shareholder let their cat play with their phone while the brokerage app was open (with no underlying reason to think Facebook is worth less than previously), it theoretically ought to be a passing thing rather than a permanent loss of cash from the bucket. The rest of us can watch it happen with mild bemusement, buy the shares they’re selling at a steep discount, then look around and say “phew, guess that’s over, same price as last week?” and have it go back to the previous price level without us needing to collectively find a replacement quantity of cash to put back in the bucket.
Also would like clarification here: “have it go back to the previous price level without us needing to collectively find a replacement quantity of cash to put back in the bucket.”
You don’t need a replacement quantity of cash, but you do need a (replacement?) quantity of eager buyers. Value does in fact need to be replaced.
Otherwise, neither Facebook nor GameStop’s stocks will ever go back to the previous price level (and we can be nitpicky and say well, if it’s part of a larger broad-market fund and everyone’s buying the fund but you still need an everyone to buy).
Would it be appropriate to rephrase my original post as follows?
(I’m sticking with the phrase “redeeming” instead of “selling” because that’s how Vanguard describes it [making it sound like a good thing rather than a bad thing].)
(I also know that “market volatility” can describe both up and down, but it’s only ever used to describe down; the point of this initial writing exercise was to describe what was literally happening when the news sites say “we’ve got a volatile market right now.”)
***
For “market volatility,” read people are redeeming their investments at a decreasing cash value, making the total potential cash value of the investment go down.
For “market growth,” read people are purchasing at an increasing cash value, making the total potential cash value of the investment go up.
For continued market growth, you need more people who want to buy at an increasing cash value and fewer people who want to sell at a decreasing cash value.
My investment protects you.
Your investment protects me.
After all, “panicked investors” can also be read as people redeeming value from the market — and if too many people decide to sell their stocks before we get a chance to request buyers, then you and I won’t get as much cash value from our investments as we were hoping to.
At least, not until more people decide that our investments are worth purchasing.
For the price to rebound, we would need there to be people willing to both buy and sell the stock at the old price. To the extent that the supply of buyers was reduced (since their desire to buy was satisfied) by a major shareholder’s cat dumping their stock, we would need to find some new buyers.
But there are people coming in/out of the market all the time—not everyone who was ever going to have an interest in Facebook stock was waiting with a bid order on the books for the cat to sell into.
Let’s say for sake of argument that the “true and actual” value of a share of Facebook stock (based on some platonic ideal analysis of the time-discounted sum of all its future dividends) is $235. Even if the cat manages to sell enough stock to temporarily punt the price down to $200, it will still be true that the sum of future dividends is $235.
There will then be a quick profit to be made by anyone noticing the discrepancy who’s willing to offer to buy at $205, who will in turn be outbid by those offering $210, or $230, or $232, or $233.50… and that’ll bring the price back into line with where it “ought” to be. There doesn’t need to be a large quantity of shares traded at those prices, because spot price is just based on the most recent trade. And if there aren’t any (non-cat) sellers willing to sell below $235 then anyone wanting to buy Facebook stock at all will need to meet their terms.
In the textbook-ideal case this would all happen almost immediately. In practice probably it would take a bit longer for the market to figure out the big sale was an irrational actor; meanwhile some people with an urgent desire to sell will have started offering at $230 or $225, so there will be a bit of churn before things settle.
Why is selling an investment at the market’s highest value point in history irrational? Because it might be at an even higher value point in history later, and by selling you practically ensure that it’ll take longer to reach the next peak?
(This is a legitimate question, btw—not a bait.)
I don’t think the price being at an all time high was a necessary, intended, or … even explicitly included part of the story I was telling. I picked the price numbers purely for purposes of illustration, by looking up the current price and rounding it—the specific number wasn’t intended to be significant.
The sale is irrational because it’s performed by a cat, who (presumably) has no useful information or analysis about the value of the company and its stock.
If the sale were being undertaken by someone intentionally, on the basis that they think Facebook isn’t worth as much as the current price implies, that would imply the existence of information that the market price should respond to.
oh oh oh oh I get it, I was reading the current story onto the story you were actually telling
thank you!
That’s an excellent point—I knew that every buyer required a seller, and that there are (rare) situations in which you could try to sell your investments only to have the brokerage firm say “sorry, no buyers available right now.”
But even though there’s the same amount of cash going to/from buyer/seller in all unique transactions, future transactions either decline or increase in value based on whether more people are trying to buy or sell (as you noted).
So if you want your future transactions to increase in value, you want more people to want to buy than to want to sell.
This is not precisely the same thing as what I originally wrote, which means it is good to clarify my thoughts in this way.