Monday, November 15, 2010

If Stocks Go to Zero...

Too often I hear people talking about disaster scenarios where they protect their savings with gold or some other supposedly safe investment in case stocks go to zero. Do these people understand what it would take for stocks to be wiped out completely?

For a stock to go to zero, the business must be wiped out. For a broad stock index to go to zero, all the businesses making up this index must be wiped out. Just imagine it: no internet service providers, no telephone company, no cell phone network operators, no cable companies, and no grocery stores.

Without internet connectivity, telephone, cell phones, or food, exactly what would we buy with our chunks of gold? I certainly wouldn’t trade a can of beans for a bar of gold in such a desperate situation.

No doubt the remedies governments are using to deal with recent financial crises will have negative financial effects down the road, but I have a hard time seeing how the average person can protect himself from a widespread disaster.

11 comments:

  1. There is one method, but it's expensive.

    Buy puts.

    Of course, if market heads anywhere near zero, nary a brokerage firm would survive and one could not cash in those puts.

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  2. Maybe the people who worry about their stocks going to "zero" are leveraged? In that case, their portfolio can hit zero long before the market does.

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  3. It may be time to load up the truck when talk about stocks going to zero becomes widespread.

    If stocks go to zero, we'll have bigger problems to worry about (like where do we get our next meal) than the value of our portfolios.

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  4. @Mark: I suppose you'd have your puts and the knowledge that you made the right call, but not much else.

    @Patrick: That's true. Anyone who was leveraged 2:1 through 2008/2009 would have been hit with painful margin calls.

    @CC: Instead of railing against comments about stocks going to zero I should just count them up as you suggest and take them as a bullish sign!

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  5. There is no need for all the stocks to dive - only the ones in the person's portfolio. Many people don't diversify. I am being always reminded by Nortel - to which I remind that they didn't dive overnight and if people insist to tell me about their losses, I ask them bluntly why did they chose Nortel... Sadly, very few have an answer.

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  6. Shotguns and can food is a much better hedge than gold. :)

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  7. @Andi: You're right that the situation is very different for people with heavily-concentrated portfolios. I'll stick with my low-cost broadly-diversified portfolio.

    @Anonymous: If you're the only one left with a shotgun, you can probably have all the gold you want :-)

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  8. Like you said, if all stocks go to zero then so has the underlying economy. If that happens, then we become subsistence farmers like so many thousands of years ago.

    What kind of event can cause that to happen, without killing just about everyone on the planet?

    I understand the thought process that people have regarding the devaluing of the U.S. dollar. Too many people who have that thought take their beliefs way too far, often sounding crazy in the process.

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  9. @Financial Uproar: I'm a believer in trying to protect myself against negative outcomes and bad luck, but I see no use in trying to protect myself against total devastation.

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  10. Yes, if the stocks go to zero, that means all the businesses have been completely wiped out. If America ever faced a time like that, gold would quite definitely be worthless. Anything worth money would be worthless, because the value of a dollar would go kaput. At that point, it would be basic essentials of life that would worth something. Alas, I've probably gone a bit too far, but I love that your post really should make people think. :)

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  11. @Jessica: Where's the fun in a discussion if you can't take it too far? :-)

    Making people think is definitely one of my goals.

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