Where Does the Money Go?

A friend of mine asked a questions about the stock market and investing recently, and it gave me the idea for today's post (thank you Greg).

The question? "When there is a huge loss in the stock market, and the stocks you buy are worth less than what you paid, where does that money go?"

Technically, it doesn't go anywhere. A stock you paid $20 dollars for still cost you $20. When it goes down in value, it just means that people are not willing to pay $20 for the stock, but might be willing to pay less. Cost is cost and value is value. It's a guessing game really. As much as the market experts try to deny it or say otherwise, it's a guessing game.

I tried to think of a way to compare it to a game like "Hot Potato". As long as the music is playing, the "value" of the potato keeps going up, and no one wants to be left holing the potato when the music stops, but they do want to be the person standing next to the one left holding the potato, so they can buy it for less money and wait for the music to start again.

I have to admit, I've found myself, on more than one occasion, caught holding that potato when the music stopped, and I must admit, it's been painful, but I have also taken it as a learning experience, helping me to refine my investment formulae, and I like to think things are starting to turn around for me.

My best example of this was a recent investment I made in Wells Fargo & Company during the last major drop in the stock market on November 21st, 2008. I was able to buy 97 shares of WFC at $20.53/share. 17 days later, I was able to sell 65 of those shares at $31.03/share. After all of the commissions for buying and selling, I was able to get back my $2000 initial investment, and leave 32 shares worth $659.91 that will earn me a dividend of $43.52 per year (6.6%) for as long as I own the shares. This is what I call "principle taking" as opposed to "profit taking" or, in Las Vegas parlance, "playing with the houses money". I always like leaving my profits where they are, and investing the principle somewhere else when I can.

I'll let you all know about the next investment I hope to make just as soon as I find it. If any of you have a question about a specific company you would like me to research, please, post something in the comments, I'd be happy to let you know what I learn and think about it.