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CPAs Will Tell You That Money Wasn't Lost in the Crash, It Just Changed Hands

December 27, 1987

James Flanigan claimed in his Dec. 13 column, "Wall Street's Disaster Was All Too Real," that the $500 billion wiped off common stocks "is gone," as in "lost forever."

This bothered me. CPAs are taught that money never vanishes, it just changes hands. So I sat and thought, where did the money go?

I think I know. Consider Joe, who bought Galacticorp common stock in May on the way up. Barring margin calls, he still owns today the same elegantly engraved stock certificate he bought six months ago. This is true whether he used corporate cash flow or his wife's nest egg to pay for it. With luck, he can even sell it today for what it cost him.

But if Joe bought at the top of the market, he can't do that. He's sitting on a loss. One hopes that he has liquid reserves and need not sell, but if he has to sell, he will lose.

So who gains? Not the man who buys Joe's Galacticorp stock--though he at least gets it at today's more realistic price. No, the real winner is the fellow who sold it to poor Joe in the first place. For cash. Call him Sam and color him smart. Where's the cash now? In Sam's bank account, earning interest.

Observe the Darwinian mercilessness of the marketplace. There will always be Joes and there will always be Sams. The wealth did not vanish, Mr. Flanigan. It passed from Joe to Sam and each incremental dollar of Sam's gain increased Joe's loss.

There are weak links in this logical chain, just as there were weak bricks in the Flanigan column. What about Treasury stock? What part do the brokers play?

But the real point is this: If we start to believe that we really need armies of commission salesmen peddling pretty stock certificates in noisy buildings, we also risk believing that the market value of common stock really matters to the economy. The best antidote is a grandfatherly figure alighting from a helicopter and going on television to remind us that it's all an illusion, which it is.

Oh, when Sam does reinvest the money he avoided losing in the market, he'll quite likely buy factories, office buildings, homes or shopping centers--the very items whose dearth Flanigan was mourning at the end of his column. I really think you got it wrong, Jim.

JEREMY STONE

The writer is a certified public accountant in Culver City.

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