Even The Wall Street Journal Does Not Really Understand the Stock Market

Today’s Wall Street Journal has an interesting article in the Heard on the Street section of the newspaper.  The article leads off with these sentences.

“Stocks aren’t a zero-sum game, where one person has to lose for another to win. But that isn’t true when it comes to fund flows—when a dollar goes into stocks, it has to come out of another asset class.”

The article goes on to say that the money boosting stocks is coming from municipal bonds, which investors are fleeing in droves.  The idea that money going into stocks has to come out of another asset class is wrong.

It is wrong because investors can borrow money to invest.  Let’s say you have $1,000 invested in stocks and $1,000 invested in municipal bonds.  Suddenly you believe that stocks are going to rise in value and you want to invest $2,000 in stocks.  You could, like the article suggests, sell all your municipal bonds and use the money to buy stocks.  However, you might simply take out a $1,000 loan, use the money to buy more stocks and not touch the municipal bonds.  In short a new dollar being invested in stocks does NOT have to come from another asset class.

 

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