Money

Money. It’s the medium we use to buy goods, services, tangible assets, and investments. Goods, services, and tangible assets have measurable, useful values. You buy food; you eat it. You pay to get your car washed; it gets washed. You buy a house; you live in it. Money is the bridge to our desires. Money is either spent or not spent. All unspent money is invested money. Many people are under the impression that money in a savings account or treasury bond is not invested money. It doesn’t make any difference if it’s in the mattress, checking account, savings account, stocks, etc. – if it’s unspent, it’s invested.

Why Do People Invest?

People’s W-2 earnings afford a lifestyle. They’re analogous to the income side of a profit-and-loss statement. A profit-and-loss statement is an annual summary of income and expenses. If a company doesn’t set aside money to invest to develop more income or value, it won’t achieve its goals. People are no different. If they don’t invest to develop more income or value, they won’t achieve their goals. There are many reasons why people invest. It could be to supplement current income, pay for a child’s college education, buy a house, buy a bigger house, retirement, etc. Whatever the reason, it’s important to know there are two traits common to every investment: (1) It can make money. (2) It can lose money.

Investment Characteristics (cautionary notes)

Investments offer three pathways to achieve a goal: (1) appreciation of the investment, (2) cash distributions (i.e. dividends, interest, or cash flow) and (3) a combination of numbers one and two.

When investing for appreciation, investors look to the earnings potential of their investment. The more investors pay for earnings, the higher their expectation for earnings growth. The mindset of many investors is analogous to that of golfers. Their expectations tend to exceed reality. This is reflected in investors seeking earnings or rents appreciating at unusually high rates for an extended time.

There’s an old story about a penny that illustrates the enormity of high growth rates. A person was once given a choice. He (or she) could receive $100,000 immediately or start with a penny, have the penny double each subsequent day, wait 31 days, and receive that amount. Most people would take the $100,000 up front. For the person who chose the penny, on the 15th day they had $163.84, and $10,737,418.24 on the 31st day. That’s the power of growth over an extended time.

Historically, high growth rates have not been good for the economy. They’ve been a source of overheated, speculative, promotion-oriented economies that breed inflation. The primary tool the government (through the Federal Reserve) uses to decelerate or accelerate the economy is the interest rate. When the economy is threatened with inflation, the government raises the interest rate.

Unfortunately, slowing down an overheated speculative economy is not something the government has figured out how to do in moderation. Consequently, the increased interest rate has been the catalyst for America’s worst economic recessions and depressions.

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