The tax only applies to realized gains. As long as they aren't selling their shares they aren't being taxed. They can also sometimes contribute the shares to tax advantaged vehicles (remember Romney having $101 million in his IRA [1]) or set up other structures to minimize their tax burden. That being said, Northern California is a wonderful place and housing and cost of living prices indicate that many people are willing to pay to live there.
It depends on the industry. Some stock valuations show that investors in certain industries like companies to hold on to cash reserves. This is especially true in the technology space where investors want companies to be able to cash in on the next big thing. Utilities, though, see their stock punished for holding onto excess cash.
Or at least if management thinks (or wants the investors to think) they can continue to exceed the ROI that a normal investor would get making their own decisions.
You can have net operating loss carry-forwards that offset profits for tax purposes in future years. You can have capital losses that can offset capital gains and some ordinary income at the investor level. So no, you didn't pay taxes on the losses.
I wonder about the state owned investment funds and if there is a parallel to state owned factories. Norway has a giant sovereign wealth fund built off of its oil industry, but does it perform as well as a private fund would? What about the California pension funds. I understand that they get screwed by their private equity and hedge investments all the time. I wonder if they weren't public funds if they would have more clout on wall street and could work out better deals to get better returns.
[1] http://www.reuters.com/article/us-usa-campaign-romney-ira-id...