Sunday, April 05, 2009

Is Marilyn vos Savant really so smart?

I had an accident today. While turning through the pages of the Sunday NY Post looking for the gossip, the Parade supplement dropped out and fell open to her column, "Ask the Lady with the Guinness Book of World Records Hall of Fame Highest IQ!" The question for her there was...

"...But what about all the folks who buy a stock at its high of $100 and then watch it collapse to $1 per share? Where did that money go? "

Marilyn's answer:
Their money went into the hands of the sellers. But this real-money figure accounts for only a small proportion of the “lost” money.

When those folks bought the stock at $100, they artificially inflated the net worth of all the shareholders, including the people who bought the stock at $1, $5, and so on. That’s because brokerage statements indicate that everyone’s stock is worth the last share price multiplied by the number of shares they own.

This huge collective amount—derived from the misleading multiple—is the nonexistent money that people believe they have lost when a stock tanks.

But what if they had all sold the stock at its peak? Wouldn’t that make the money real? Nope. That was never possible. Only the early sellers get the peak price. When sellers start to outnumber buyers, the price drops. And with many would-be sellers, the stock plummets. Shareholders find themselves back at square one, asking the same question: “Where did all the money go?”
Huh? Can you follow that? I suppose her first sentence was literally correct, and she might have stopped there. But she went on, and the rest of her answer was a mix of incoherent and wrong. For instance...
When sellers start to outnumber buyers, the price drops
... is flat wrong. At any given market price the number of shares sold and bought exactly match ... obviously! And as to the numbers of sellers and buyers, who knows? On either side there could be one person dealing all the shares, or as many people as shares dealing one each, or anything in between.

Moreover, it makes little sense to talk about numbers of buyers and sellers, because at a high enough price everyone who owns a stock will try to sell it, while at a low enough price hordes of people will seek to buy it. So potential buyers and sellers both exist in the market in indefinitely large numbers at all times. What the market does is find the one price at the moment at which the number of shares sought to be sold and sought to be purchased are equal.

And her ...
But what if they had all sold the stock at its peak? Wouldn’t that make the money real? Nope.
... muddles "value" with "money" to everybody's confusion. Nobody "makes money real" except the Federal Reserve using green ink and special paper.

So was that answer really worthy of a purported IQ of 228? Or does the economy operate so counter-intuitively that even geniuses don't understand the very basics unless they read a textbook about it?

My own proven middlin' IQ might have answered something like this, in the same number of column inches...

"To say somebody 'made money' in the stock market is a colloquialism. Nobody literally does that -- the Federal Reserve makes money with printing presses.

"When buying stock shares you swap money for them, when selling shares you swap them for money. There's no mystery about where the money goes -- back and forth between buyers and sellers, in unchanged amount.

"When stocks shares you own go up in price you may think, "I made money!", but actually you gained wealth through their increase in value. If your shares fall in price you may cry, "Where did my money go?" But you lost wealth, not money, as their value fell. Your money was gone before their value fell, as of the date you bought them. To see where it went look in your checkbook: to whom did you write that check?

"As the stock market rises and falls, no money is literally "made" or "lost" at all.

"The simple lesson is: don't take colloquialisms literally, you'll confuse yourself."

The next question for Marilyn was...

My neighbor claims that one cup of regular brewed coffee has more caffeine than one shot of espresso. Is he right?

Her answer....
Yes. At Starbucks, the world’s largest chain of coffee houses, one cup (8 oz.) of coffee has about 180 mg of caffeine. A shot (1 oz.) of espresso has about 75 mg....
It takes an IQ of 228 to call Starbucks and ask: "Hey, which has the most caffeine...?" (Or tell your assistant to do it?)