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Saturday, February 12, 2005

A Simple Stock Market Question

Everyone accepts two facts about the stock market:

1) In the past, in the long run (suitably defined), the overall value of stocks has risen. We can compute this rise by comparing the price of specific stocks over the time period in question.

2) Paper profits are not the same as cash in the bank. It's possible for (almost) everyone's paper holding in a stock to double at once, if there's a high demand for the stock but most holders of that stock continue to hold it. But generally, everyone can't end up with double their money, because if all the holders sell at once, the price goes down. How much does the stock fall in that case? I certainly don't know.

So in the debate about the long-term appreciation of the stock market, we can meaningfully talk about what an individual would have made by buying an index fund (or the stocks in the index, before index funds), but we can't talk about how much 100 million people would have made of they had all put money into the index and then sold that index 40 years later. The question is: is this latter number computable in any way?
- posted by Don Porges @ 2/12/2005 04:51:00 PM

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