Billions On Paper. How Are Billionaires' Fortunes Measured And Why Are They Evaporated In Days?
Money and business Economy News - When headlines make headlines about Elon Musk losing $57 billion in a week, or the fortune of Google founders Larry Page and Sergey Brin falling by about $56 billion combined in a few days, it seems like billions of dollars suddenly disappeared from their bank accounts.
In the world of great wealth, “loss” does not necessarily mean cash out, but often reflects a change in the market value of the assets they own.
Here comes a fundamental question: do billionaires really have all this money in cash? And how are their wealth even counted? Why are Forbes’ estimates sometimes so different from Bloomberg by tens of billions of dollars?
The first common misunderstanding regarding the wealth of billionaires is the belief that it is money deposited in bank accounts. In fact, most large net worth holders are concentrated in the bulk of their wealth in equity, equity, and long-term investment.
Elon Musk, for example, does not keep hundreds of billions in cash, but his wealth is mainly related to his stakes in Tesla, SpaceX, and other companies.
The same goes for Larry Page and Sergei Brin, whose wealth is based mainly on their ownership in Google’s Alphabet, while Mark Zuckerberg’s fortune is based on his stake in Meta.
Therefore, any change in the share price immediately falls on the estimates of wealth, even if the billionaire does not sell a single stock.
How does a person lose $10 billion in a single day?
In theory, let’s say that an investor owns 10% of a company with a market value of $1 trillion, in which case his share is worth $100 billion.
If the company’s market capitalization declines by only 10% to $900 billion, the share will fall to $90 billion. The result is that the investor theoretically lost $10 billion in a short period, although the company did not close a factory and its sales did not necessarily decline.
This is exactly what happens to the major billionaires when the shares of technology companies, artificial intelligence or e-commerce are exposed to wide selling waves in the markets, wealth here is linked to the price of the intraday market, and not only the direct operational performance of the company.
Why are estimates different?
It may seem strange that the competent authorities in measuring wealth differ on the value of the wealth of the same person by tens of billions, but the fact that the calculation of wealth is not a rigid calculation, but depends on a large set of assumptions and estimates.
For example, Forbes magazine estimated at some times the wealth of Zhang Bingzhao, the founder of Binance, at about $114.6 billion, while Bloomberg’s estimates were much lower and approached $91 billion.
This is due to several factors, the most important of which are the different way of evaluating private companies, whether personal debts are calculated, how to deal with illiquid assets, estimating the value of large shares that are difficult to sell quickly, calculating restricted shares or private voting rights, and the timing of updating data and prices.
Therefore, there is not a single “real” wealth that is absolutely agreed upon, but rather an estimated scope based on the methodology used.
Private companies... The biggest challenge in calculating wealth
If the valuation of the wealth of the owners of listed companies is relatively easy because of the existence of a declared market price per share, the situation is radically different for private companies, these companies do not have a price that changes every second as it happens in the stock exchange, and therefore its market value cannot be known accurately daily.
This is why the specialized authorities rely on a number of discretionary tools, such as the latest funding round obtained by the company, stock trading prices in the private secondary markets, compared to similar listed companies, and estimates of revenues, growth and future profitability.
But these methods remain estimates and are not direct market prices, making the valuation of the wealth of private company founders more vulnerable to difference and volatility.
Can the billionaire turn his fortune into cash?
The short answer: Not easily, the existence of a theoretical wealth of 100 billion dollars does not mean the possibility of obtaining this amount in cash within days, and if the owner of a huge share tries to sell all his shares in one go, it may lead to a sharp decline in the share price as a result of the increase in supply in the market, and the lower the price, the lower the actual value that can be collected from the sale.
Senior executives and founders are often subject to regulatory restrictions and prior disclosures when selling their shares, making liquefactions a gradual process that could take months or even years.
That’s why many billionaires rely on borrowing against their stock instead of selling it, a strategy used by a number of top tech technologists in recent years.
Is paper wealth real wealth?
The most accurate answer is that it is a real wealth economically, but it is not ready-to-use cash, it is real because it represents actual ownership in productive companies and assets and gives its owners enormous economic influence, and can be used as a guarantee to obtain huge financing or implement acquisitions and investments.
But at the same time, it is “paper” because its value depends on the market’s valuation at a given moment, and it may rise or fall by billions of dollars over days without any material change in the underlying business.
So when we read that Musk, Zuckerberg, or Big lost tens of billions in a week, what happened is often not the evaporation of money from their accounts, but rather the decline in the market value of the assets they own, and these assets may regain their value after weeks or months if the appetite of investors improves and stocks return to rise.
In the end, the lists of billionaires reflect the current estimated value of the assets more than the liquid funds already available, so $ 50 billion of wealth can disappear on paper in one week, and then return at the same speed the following week, while companies, factories, employees and businesses remain almost the same