Paper loss vs. Real Loss

[kbM3]

I think you are correct. I think you should sell all you have now and wait for the SP to drop further and buy back.

Actually I am buying now, so I don’t get the relevance. Is personal attack your normal argument technique?

Objectively that's simply untrue, unless you're leveraging the asset for something else requiring a mark. There is a reason the terms realized and unrealized gains/losses exist.

Like others, I am a bit puzzled in regards to your point on this.

I am saying unrealized and realized losses are both real.

Contrived scenarios are just contrived scenarios. All you're saying is that hindsight is better than foresight.

Nope. I gave a specific example proving there’s no difference.
If you have an example showing why paper losses are not real, -lease provide it.

 

[Wooloomooloo]

I am saying unrealized and realized losses are both real.

In the existential sense? Yes. But your framing of it heavily implies equity (pun intended), or at least you were equivocating, which is not the case. I think that's what people were pushing back on.

 

[kbM3]

Consider an investment in a company like Tesla as an investment in real brick & motor, machines and knowledge of people. What you bought is not a piece of paper like money with an associated promise for exchange but something you can touch and that creates a margin and profit.

Now in your example with the money stolen you lost the document that enables you to exchange the promise into services or products.

For Jane, she still owns the same amount of assets like before only if she wanted to exchange this for a paper promise (Money) today she would get less of it.

Its two fundamental different things and I suggest if you have an issue to follow that thought, which is totally fine and no offense, consider to stop investing the stock market because the likelihood that you will loose money on the long run is exceptional high.

Responding in side thread so as not to derail the main one.

They’re the same because Fred bought Tesla after his “real loss”. They both own 10 shares of Tesla.

You have to separate the loss at the time it’s being called a loss, from any future actions. That’s specifically why I had Fred buy 10 shares of Tesla in my example. I wanted to remove any difference in subsequent actions, so that we can zero in on the point in time for the loss.

What in the world are you talking about me needing to stop investing for? Just because I realize my net worth is down by 25% in less than a month, does not mean I’m dumb. I was gradually de-leveraging during the rise to reduce my risk profile. I’m gradually re-leveraging during this drop, including this morning when I bought 20 TSLA shares. I’m debating how much to buy and at what points if the stock falls more. I probably should not buy more considering my risk is already somewhat higher than it should be, but it’s hard to resist.

Are you serious that you believe pretending share price drops are not real losses, is a good technique for investing?

I’m saying drop the psychology and invest based on risk profile and an assessment of what will happen going forward. Pretending share price drops are not real losses, or pretending that just because you have a low cost basis, you haven’t lost money is bad logic and can lead to bad decisions.

Pretend the money is in a tax free account and one investor holds 100 shares he purchased at $30, and another investor holds 100 shares purchased at $900.

Fact 1) They are in the same place. They both own 100 shares of Tesla. It’s irrelevant that one used to have a net worth of $3k and increased it to $60k, or that the other had a net worth of $90k and saw it decrease to $60k.

Fact 2) One should not make decisions differently than the other because the cost bases are different. Regardless of how they started out, they both are now in the same position. All decisions should be based on whether Tesla is a good investment going forward, relative to other investment opportunities.

Fact 3) With the share price at $600, they both have had real losses of $30k relative to their net worth when the share price was $900.

Fact 4) If the Investor who bought at $900 sells TSLA today at $600 that is not “locking in a loss” relative to the other. Maybe that investor purchases shares in a Genomic breakthrough company that does even better than Tesla. Maybe he gambles it in Vegas and loses it all. It doesn’t matter. They both have lost $30k as of today.

The point is share price drops change your net worth and are REAL. The only thing that matters is how you process the loss and respond to it, whether that response is selling shares and buying call options, holding fast, or selling shares and going to Vegas, selling other stocks and buying more Tesla... You have to separate the loss that occurred from what future actions should be taken.

 

[wipster]

Responding in side thread so as not to derail the main one.

They’re the same because Fred bought Tesla after his “real loss”. They both own 10 shares of Tesla.

You have to separate the loss at the time it’s being called a loss, from any future actions. That’s specifically why I had Fred buy 10 shares of Tesla in my example. I wanted to remove any difference in subsequent actions, so that we can zero in on the point in time for the loss.

What in the world are you talking about me needing to stop investing for? Just because I realize my net worth is down by 25% in less than a month, does not mean I’m dumb. I was gradually de-leveraging during the rise to reduce my risk profile. I’m gradually re-leveraging during this drop, including this morning when I bought 20 TSLA shares. I’m debating how much to buy and at what points if the stock falls more. I probably should not buy more considering my risk is already somewhat higher than it should be, but it’s hard to resist.

Are you serious that you believe pretending share price drops are not real losses, is a good technique for investing?

I’m saying drop the psychology and invest based on risk profile and an assessment of what will happen going forward. Pretending share price drops are not real losses, or pretending that just because you have a low cost basis, you haven’t lost money is bad logic and can lead to bad decisions.

Pretend the money is in a tax free account and one investor holds 100 shares he purchased at $30, and another investor holds 100 shares purchased at $900.

Fact 1) They are in the same place. They both own 100 shares of Tesla. It’s irrelevant that one used to have a net worth of $3k and increased it to $60k, or that the other had a net worth of $90k and saw it decrease to $60k.

Fact 2) One should not make decisions differently than the other because the cost bases are different. Regardless of how they started out, they both are now in the same position. All decisions should be based on whether Tesla is a good investment going forward, relative to other investment opportunities.

Fact 3) With the share price at $600, they both have had real losses of $30k relative to their net worth when the share price was $900.

Fact 4) If the Investor who bought at $900 sells TSLA today at $600 that is not “locking in a loss” relative to the other. Maybe that investor purchases shares in a Genomic breakthrough company that does even better than Tesla. Maybe he gambles it in Vegas and loses it all. It doesn’t matter. They both have lost $30k as of today.

The point is share price drops change your net worth and are REAL. The only thing that matters is how you process the loss and respond to it, whether that response is selling shares and buying call options, holding fast, or selling shares and going to Vegas, selling other stocks and buying more Tesla... You have to separate the loss that occurred from what future actions should be taken.

There's a big difference: Fred may have 10 shares of TSLA, but he also PHYSICALLY LOST $3,000. Jane also has 10 shares of TSLA, but is physically whole, she still has all of her money. And no matter how much TSLA gains or loses on the stock market, Fred will always be $3,000 poorer than Jane.

That is the difference between paper and realized loss.

 

[kbM3]

I suspect if you continue investing over the years, your perspectives on the differences between realized and unrealized losses will develop and mature.

That aside, my shares purchased between $184 and $262 (which is the vast majority of my shares) don't even have unrealized losses. They have unrealized gains. The only TSLA shares I own that are not solidly in the money, 100 shares I bought a week ago Friday, have been alternating between unrealized losses and unrealized gains today.

And it doesn't really matter exactly where it closes today because I'm not contemplating borrowing against them.

Replying out of the main thread.

seriously? You think the argument from authority is persuasive? I suspect that as you learn more, and argue more, you will find that it doesn’t work on everyone l. Has it seriously been your experience that it works?

What I notice is that you ignored the original question.
Once again. Explain why paper losses are not real.

I seriously do not care that your net worth is in the millions. Whatever your net worth is, if you’re invested in Tesla, it is less than it was back when the share price was $900. You may like to pretend that your net worth did not drop because the drop was not real, but that viewpoint is factually incorrect.

 

[kbM3]

Hmm, Jane suffered an opportunity loss. But you know, I bought my first Tesla shares at $54/share. It turns out that every share I bought after that was an opportunity loss too. I could have bought about 5 times as many shares back then at $54/share than I currently have. Even Jane could have bought shares for considerably less than $900 just a month earlier. Pretty much all of us are sitting on massive opportunity losses. Maybe Fred got luck buying at $600 for a few brief moments this morning. But if the price went to $420 some time in the future, then we would have to conclude that even Fred is suffering opportunity losses. A "paper loss" is little more than "Huh, I guess I could've gotten a better price." Hindsight will do that to you.

I don’t disagree with anything you’re saying. I’m arguing against the logical fallacy some have that losses are not real until you sell. It’s a completely invalid viewpoint. Your net worth declines. The loss, whether realized or not, is real.

Also some people have the wrong viewpoint on cost basis. Some feel future decisions (even in an IRA) should be based on cost basis, whereas they should not.

Let’s take JHM prime who was far richer than you initially, but who waited and bought just as many shares as you now have, but spent $900 / share (rather than $54 / share) to acquire them. You and he are now in identical positions, have an identical number of Tesla shares, have an identical net worth. Ignoring tax consequences you both should make the same decisions going forward. It’s irrelevant that you’ve gained so much and that he started out far wealthier and lost. You’re both in the same place and should make the exact same decisions going forward if we set aside tax consequences. Oftentimes people like you feel more secure than they should because they’re up so much, and people like JHM prime are bummed out because they’re down so much. But that is completely irrelevant. They are both in the same place and should both make the same decisions.

Just in the thread today there was someone bragging that they weren’t worried because their cost basis was $480 (or $240 or something). I’m saying:
1) The past is irrelevant (except for tax consequences in which case JHM Prime is actually in better shape than you because of a higher cost basis).
2) Paper losses are just as real as any other. They are in no way equivalent to opportunity losses. Whether you’re up or down in a stock is not relevant to investment decisions going forward. The only thing that matters is how you believe that investment will do in the future relative to all others.
3) The whole concept of locking in profits or locking in gains is flawed. Again, apart from tax consequences, it is irrelevant.

 

[kbM3]

There's a big difference: Fred may have 10 shares of TSLA, but he also PHYSICALLY LOST $3,000. Jane also has 10 shares of TSLA, but is physically whole, she still has all of her money. And no matter how much TSLA gains or loses on the stock market, Fred will always be $3,000 poorer than Jane.

That is the difference between paper and realized loss.

So if Fred had the money in a checking account, and it was taken be a Cyber criminal, it wouldn’t be a real loss, because it’s not physical?

‘I’m defining real loss as a negative change in net worth because of a share price decrease. Do you really wat to define real losses as physical?

 

[wipster]

So if Fred had the money in a checking account, and it was taken be a Cyber criminal, it wouldn’t be a real loss, because it’s not physical?

‘I’m defining real loss as a negative change in net worth because of a share price decrease. Do you really wat to define real losses as physical?

Get a grip dude.

 

[kbM3]

There is a psychological difference between paper loss and real loss. If you believe in the company, then inevitably you will want to buy back in at some point. If that's a good company then generally speaking price will be more likely to go up than down. So say you sold 100 TSLA at 600 and took a $30,000 loss, you will wait for price to go down which is less likely to happen. Basically we are arguing timing the market vs time in the market. Collectively, timing the market loses although individually, you have a higher than 0% chance to profit.

I am responding out of the main thread.

I agree there’s a psychological difference. I’m arguing that there shouldn’t be. That people shouldn’t take into account the past. The only thing that matters is the present state, the tax consequences and your best guess on the future of the companies you wish to buy. and/or hold.

‘I see two basic fallacies among many people:
1) If I don’t sell, the loss is not real.
2) As long as it’s above my cost basis, I’m still ahead.

I define a real loss on a stock as a drop in the value in your position over some time period. It is perfectly valid to say I had a $300 / share loss since the price was $900, or to say I had a $300 / share gain since the date the price was $300 / share. I have no idea how others are defining a real loss. I guess they’re defining it as a realized loss, but that’s just an IRS mechanism for determining capital gains. It seems like an avoidance mechanism to think “this loss is not real because I have not sold”.

 

[kbM3]

Get a grip dude.

I seem to always find those who have no answer resort to either pivoting or insults.

Why is that?

 

[adiggs]

I am responding out of the main thread.

I agree there’s a psychological difference. I’m arguing that there shouldn’t be. That people shouldn’t take into account the past. The only thing that matters is the present state, the tax consequences and your best guess on the future of the companies you wish to buy. and/or hold.

‘I see two basic fallacies among many people:
1) If I don’t sell, the loss is not real.
2) As long as it’s above my cost basis, I’m still ahead.

I define a real loss on a stock as a drop in the value in your position over some time period. It is perfectly valid to say I had a $300 / share loss since the price was $900, or to say I had a $300 / share gain since the date the price was $300 / share. I have no idea how others are defining a real loss. I guess they’re defining it as a realized loss, but that’s just an IRS mechanism for determining capital gains. It seems like an avoidance mechanism to think “this loss is not real because I have not sold”.

I'll throw in my 2 bits. I think part of my own visceral reaction is that the next step to treating paper losses as real, is to get into day / short term trading and trying to time the markets.

If that isn't what you're arguing, that'd be worth clarifying.


My view of things - I own the same fraction of the company today as I owned when it was at $1xx, $9xx, and today. I agree that the "losses" are real, in that my net worth has changed. My net worth changes every day, and sometimes by numbers that a few years ago would have freaked me out (good and bad). And yet, it doesn't change, as I continue to own the same fraction of the market as I owned before (up or down).

What makes a gain or loss real, for me, is the sale and the imposition of taxes. So maybe the better term is realized and unrealized changes in net worth, with differing views on their impact and desire to react.

Maybe you could clarify what you're arguing. It appears that you're arguing for daily reevaluations of one's positions, based on the change in price. One's view on the future value, and the tax consequences associating with realizing the change today, and the history is irrelevant.


I actually agree with that, as long as we extend the timeframe to more like a year; that's about how often I reevaluate Tesla's fortunes, with minor evaluations of strategy and execution along the way. And my current investment thesis is there will be a serious reevaluation in about 10 years, with nothing I see on the horizon to make a change sooner than that. (That's also been the state I've been in for the last 8 years).

 

[TheTalkingMule]

Paper!

 

[Buckminster]

Paper loss is as real as cash, that is in fact a piece of paper with a promise written on it.

 

[TheTalkingMule]

Paper!

 

[kbM3]

I'll throw in my 2 bits. I think part of my own visceral reaction is that the next step to treating paper losses as real, is to get into day / short term trading and trying to time the markets.

If that isn't what you're arguing, that'd be worth clarifying.


My view of things - I own the same fraction of the company today as I owned when it was at $1xx, $9xx, and today. I agree that the "losses" are real, in that my net worth has changed. My net worth changes every day, and sometimes by numbers that a few years ago would have freaked me out (good and bad). And yet, it doesn't change, as I continue to own the same fraction of the market as I owned before (up or down).

What makes a gain or loss real, for me, is the sale and the imposition of taxes. So maybe the better term is realized and unrealized changes in net worth, with differing views on their impact and desire to react.

Maybe you could clarify what you're arguing. It appears that you're arguing for daily reevaluations of one's positions, based on the change in price. One's view on the future value, and the tax consequences associating with realizing the change today, and the history is irrelevant.


I actually agree with that, as long as we extend the timeframe to more like a year; that's about how often I reevaluate Tesla's fortunes, with minor evaluations of strategy and execution along the way. And my current investment thesis is there will be a serious reevaluation in about 10 years, with nothing I see on the horizon to make a change sooner than that. (That's also been the state I've been in for the last 8 years).

I’m just arguing that unrealized gains and losses are just are real as realized gains and losses. They affect net worth, they can make you a billionaire (They’ve allowed Elon to purchase 5 Bel Air mansions for instance). The difference is just that realized gains describe the final gain/loss after you no longer own the asset, whereas unrealized gains/losses describe the condition while you do hold it.

Current taxation only works on realized gains, but there have been proposals of taxation on net worth, which would include unrealized gains.

Gains and losses come in two flavors. Someone choosing to say one flavor is real and the other is not real is just wrong.

I advocate making investment decisions based on which assets you believe will appreciate the best going forward. Aside from tax consequences, the decision to sell should not be based 0n what you bought it for, and whether it’s gained or lost. Just based on whether you believe you have a need for the money, or an alternative investment that has a better risk profile, or better appreciation.

As far as Tesla, I’m far less likely to sell when it’s lower, because the lower it goes, the more it will appreciate from that point going forward. I.e. Tend to buy low and sell high, and ignore what you paid for it and whether or not it has gained a lot, or lost a lot. The past is a relevant. Only the present state (including cost basis for tax consequences), and the future matters.

 

[adiggs]

Thank you for taking the time to respond.

I find that your explanation is unsatisfying to me, because it doesn't help me understand why it matters. Within the context you've described, I agree 100% that unrealized gains and losses are equally real.

Maybe we're different in that you're keeping a closer eye on your net worth day to day, or week to week. I know that I'm routinely seeing swings north of $10k, and more than a few days recently with swings over $100k. But I really don't notice it either way, really, except how it's changed year over year (given that the underlying investment thesis still holds true).

So yeah, all the gyrations along the way are real. And for me, irrelevant.


You didn't clarify your timing on 'advocate investment decisions based on which assets you believe will appreciate the best going forward'. I advocate the same, but I'm also clear that for me, I make that evaluation about whether to make a change more like 1-3 times per decade (I frequently have years with no reportable gains or losses, because there were no sales that year).

As long as your view is compatible with either long or short term investment decisions, then we're saying the same thing and are in violent agreement. Absent the timing consideration, what you've been advocating for sounds a lot like daily or weekly reevaluation (not because you've said it, but because it's more commonly associated that way with the viewpoint).