The Mythical Investment Nebula!

Should a lot of Americans own stock?  The New York Times and, more amusingly, Gawker have written about a recent Gallup survey that found the percentage of Americans owning stocks, in one form or another, is declining. The articles are a bit unclear about exactly what this means, but in the journalists’ opinion, one thing is for sure – more Americans have missed out on the recent market upswing so far in 2013. And that’s a shame.

To me, this notion of  “the masses missing out” (or the masses doing anything as a phalanx in the investing world) is misguided. So much that I have decided to give this phenomenon a name: the “Mythical Investment Nebula,” a vast unseen, unknown third party that somehow plays a pivotal role in the way markets work.

How the Nebula got its name

The Nebula is often indirectly referenced in the financial press in headlines like “Investors Flee Stocks” or “Gold Buying Spree.” When you really think about these headlines, they are nonsense. The market price of stocks or gold might have shifted, but there can’t be an unbalanced “dumping” or “buying” of any investment. For every investor dumping stocks, there was another investor buying them. If some investors are “dumping” stocks, that means other investors are “piling into” stocks – it just may be at a higher or lower price than the day before.  Any headline that says investors are selling could instantly be reversed to say other investors are buying. This isn’t a haughty academic theory. It is a simple fact, although it is such a simple fact that it is often overlooked.

The Nebula is not on the other side of your trade 

Most of the financial media treat the stock market like a disembodied Nebula. In this mindset, the investing masses can sell to this entity and “be out” or buy from this entity and “be in.”  The typical investor attitude is that everyone could have made more money if they could be  in stocks when the market is going up and out of stocks when the market goes down.

This is simply impossible. For example, had analysts warned everyone that the market was going to go down in 2008, could the world have avoided the losses?  Answer: no.  Who would they have sold to? Certainly not to another investor who also knows the market is about to go down. All stocks have to be held by someone at all times. There is no Investment Nebula out there that can hold onto our stocks for a while. This is also why everyone can’t beat the market.

Returns can’t “disappear”

Back to the NY Times and Gawker articles lamenting the returns that have been lost because less Americans own stocks. The fact is that someone – a person or institution like a pension fund – was in fact holding these stocks. The percentage of  individuals owning stocks may have dropped; that may be  caused by shift of wealth or risk attitudes that is concentrating stock ownership in a smaller percentage of the population. But it is incorrect to imply that our country, in aggregate, would be “richer” if a larger percentage of Americans held stocks this year.

I repeat, there has not been a drop in the total wealth that is held in stocks. This is impossible because someone, somewhere, was holding these stocks as they went up. Unless, of course, you think they were sold to the Mythical Investment Nebula.

 Photo by European Southern Observatory