I was recently at UPS to pick up a package and got talking to one of the guys there, the hot – topic of that particular day was AIG’s 60 billion dollar quarterly loss, and how AIG’s ex CEO had sued the company for his personal losses.
In a CNBC interview that morning – Mr. Hank Greenberg – the Ex – CEO of AIG said that he lost over 2 billion dollars in personal stock of AIG, and had sued AIG for those losses.
The question that was bothering the guy at UPS was this – “Where did all the money go?”
The short answer to that question is – it just vanished.
Here is the long answer to it.
How did the Money Vanish?
The current melt-down has meant that the price of stocks and real-estate has fallen dramatically, which means – home owners who were invested in stock are much poorer now, than they were a few months ago.
So, in the case of Hank Greenberg, he may have had 50 million shares of AIG that were worth 40 bucks each, and the total value of his AIG stock would have been 2 billion dollars about six months ago.
When the same shares came crashing down to 40 cents — he lost those two billion dollars from his net worth (almost). And the wealth simply vanished.
How Do You Measure Your Net – Worth?
I am sure all of us have felt what Mr. Greenberg felt when he lost his two billion, but at a much scaled down level. We saw our net worth decline substantially because we measured it in terms of the value of assets we hold.
However, I am not so sure why the standard way of calculating a person’s net worth is to sum up his assets. In the case of companies the – Discounted Cash Flow – model is very popular, which is the sum of all future earnings that a company will make, adjusted for inflation.
So far, I haven’t seen a calculator that allows for this type of net worth calculation for regular people. If we were to go by this, we would calculate the net worth of a person based on:
- his annual earnings,
- number of years he has left to earn,
- a growth rate and
- a discount rate.
I think this would give a very good idea of how much a person is really worth. This model will be much easier on the nerves of most people, as the volatility in stock markets is much higher than the volatility in most people’s pay checks. It will also protect people from going on a shopping binge when the market is at all time highs.
On the flip side this model will not be good for people who have run up high levels of debt, as it doesn’t account for expenses and debt repayments.
So, what do you think, does the idea have any merit? If so, would you be interested in seeing a Net Worth calculator of this kind like the CAGR calculator?