PAPER LOSSES ARE REAL LOSSES, STUPID!

Paper Losses Are Plain and Simple Real Losses - Don't Lie to Yourself and Others!

Money is something you got to make in case you don’t die.
- Max Asnas

Recently I got into a debate with friends whether they had actually lost money in their investments.

I mentioned that people are terribly deceiving themselves if they
claim that they have only encountered "paper losses" because they haven't yet sold their shares, houses, or any other investments. I claimed that anyone who says, "It's only a paper loss" is simply lying to himself or herself and others about whether an actual financial loss has occurred.

Plain and simple, I stated, "If today you can buy the investment for anything less than you paid for it, you have experienced a real loss. To claim that it is only a "paper loss" is to lie to yourself and others and be in denial that you have not had a real loss. This type of lying by financial advisors is why the world is in such a financial mess today."

One of my friends got particulary upset with me for my frankness, as most people do when you tell the truth which they don't want to hear. First, this friend claimed that I didn't know the meaning of "paper loss" and it only referred to  the difference of what the investment could have been sold for at the height of its value and what it could have been sold today."

Okay, I thought, perhaps I am wrong in the definition, but I still thought that paper loss referred to the difference between what you paid for the item and what is was worth today, but accounting for the fact that you haven't sold it yet.

Later I checked the definition of "paper loss" on two authorative websites:

"paper loss - Definition - Loss which has occurred but has not yet been realized through a transaction, such as a stock which has fallen in value but is still being held. also called unrealized loss."

From Investepedia

(started by 3 young Edmonton entrepreneurs and purchased by Forbes.com for $45 million)

See  Paper Profit and Paper Losses

"Paper Loss: "Unrealized capital gain (or capital loss) in an investment. It is calculated by comparing the market price of a security to the original purchase price. Gains or losses only become realized when the security is sold.

What it means:

Investors commonly justify bad investment decisions calling these investments paper gains or losses. Two examples:

1. Although you officially recognize a transaction when you sell a security, many investors believe they haven't lost any money in a sinking investment because they haven't yet sold it. While you don't have a capital loss for tax purposes, there is a loss in value.

2. On the flip side, the dotcom boom saw many "paper millionaires" created due to stock options. The problem was that rules in options contracts made it impossible for these people to sell their stock and realize their wealth. Consequently, after the dotcom market crashed, many paper millionaires went broke."

So to conclude, paper losses are real losses! You can lie to yourself and your friends about it, but don't lie to me!

COPYRIGHT © 2010 by Ernie J. Zelinski
 All Rights Reserved

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