Thursday, November 17, 2011

Millionaire - On Paper

Some folks use phrases like, 'Well, I'm a Millionaire, at least on paper' - what does this mean?

During the boom times of 2005-2008, many folks did some pencil scratching on the back of an envelope, and figured out that, with the dramatic increase in the values of their houses and 401(k) plans, that they were "Millionaires, at least on Paper."

What does this mean, "on paper"?

Well, as we discussed before, appraised values for assets are not really "real" in any sense of the word.  The "value" of your house doubles during the Real Estate bubble - technically, your net worth increases.  But until you sell the home and "cash out" (create what the IRS calls a "realization event") the actual change in value is merely theoretical, hypothetical, and and not actual.

Similarly, if you take your stock portfolio (or 401(k) mutual fund statements) they may look like nice numbers - on paper.  But until the day you cash out and sell those funds, it is all just a hypothetical of what you might get for those stocks and mutual funds, if you were to cash out.   And a lot can alter those numbers.

For example, suppose everyone decides to sell at once - as happened in February 2009?  Suddenly, the "value" of your portfolio can plummet dramatically.  Valuating your stocks based on what the "last chump in" paid for his share, is often illusory.  And yet we do this all the time, saying, for example, that Bill Gates or the late Steve Jobs is worth umpteen billion dollars, based on the current market price of Microsoft (or Apple) stock, multiplied by the number of shares owned.  But of course, if Bill Gates liquidated his interests in Microsoft all at once, it is certain he would not get the full "retail" price for all those share.  The very sale of the thing would plummet the price.

And of course, even if you can cash out of your investments, what do you really have?  Cash, which is nothing more than more paper.  The value of money fluctuates over time - and it is hard to even compare money values over time.  While a dollar today buys a lot less gas than it did in 1965, it buys a helluva lot more computer or television that it did back then.

Money itself can fluctuate based on inflation as well.  You might "cash out" and then find your cash is worth nothing - as happened to people in Argentina in the 1970's or in Wiemar Germany in the 1920's.

Now some wags might say, "Well, that's why I bought GOLD!  That at least is something real!"  And that is a nice fantasy, but also flawed.  Gold does serve as a currency of sorts, but its actual value fluctuates as well.  In the last five years, it has largely gone UP, but it also has been very volatile, particularly in the last few months, where the price has jumped up and down by hundreds of dollars.  A million dollars worth of gold sounds like a sure thing - but it can turn to a half-million dollars worth of gold in short order - once the market corrects itself.  And if your investment in gold is invested with a gold company - well, then all you really have are numbers printed on pieces of paper, right?  It is just gold, "on paper."

The long and short of it is this:  If you say you have X dollars "on paper" you are just being redundant.  All investments are theoretical this way - they are little more than ideas, really, about who owns things.  And ideas can be changed, radically, in some instances.  For example, a lot of people in Batista's Cuba thought they owned a lot of farms, casinos, hotels, factories, and the like.  But overnight, most of this was nationalized, and people went from being "millionaires" on paper to paupers.

The value of your investments, your money, and even your gold, is based on an unwritten agreement amongst all of us to recognize these values.  And this unwritten agreement is basically the foundations and underpinnings of our society - including our government.

Thus, it is somewhat disturbing how some folks would like to see our government undermined, or indeed, even abolished.  Many on the far right are calling for a radical overthrow of the government, or even succession, based on some imagined outrages.  The only problem with this argument is that it would, "on paper", make most of us bankrupt.  You have to be careful what you wish for.

Of course, some of these far right radicals have invested in nothing else but bunkers filled with canned goods, guns, and ammunition.  And under that scenario, the person with those assets will be able to "cash out" in a post-Armageddon era.   But is this where we want to go with our society?  I still like to think that it is worth saving, at this point.  Far worth saving.

And while we all like to decry the bailout of many Wall Street institutions, banks, and car companies, the net effect of that bailout was to preserve, "on paper" much of the wealth you have accumulated.  If major investment firms and two of the big-3 car companies were allowed to fail, the landscape of America today would be radically different.  Imagine if the only remaining car company in the US was Ford - with the Japanese, Koreans, and Europeans owning the rest of the business?  Imagine if you lost not just part of the value of your 401(k), but all of it - irrevocably and irretrievably.

Preserving the idea of money is important, otherwise utter chaos ensues.  All of our accumulated wealth is really, just "on paper" - if you think about it.