Thursday, September 27, 2007
Investments
Several years ago, I spent quite a bit of time thinking about what exactly constitutes a safe investment. This post on Kim’s site, and the subsequent comments, started me thinking along those lines again.
First, understand that my definition of “safe” is a little different from typical. I’m not a survivalist, in the “stockpiling canned goods and laughing at all of the people that are going to get really hungry when the oil runs out” sense. However, the lifestyle I’ve chosen looks like it. I value independence more than almost anything else, because independence brings freedom. I don’t want a cellar full of canned goods. I want chickens, cattle, sheep, a stockpile of heirloom seeds, beehives, and farm equipment that doesn’t run on diesel. My dream is to have a farm that is as self-sufficient as possible - one that functions well even without electricity, propane, gasoline, or diesel.
This mindset greatly influences what I consider “safe”.
Typically, standard investments have an inverse relationship between risk and reward. Junk bonds and penny stocks are cheap, and the payoff can be huge if you get lucky. On the other hand, you’ll lose your entire investment a significant portion of the time. On the opposite end of the spectrum are T-Bills, where your dollars are backed by the ability of the federal government to print more money, thus ensuring your return while simultaneously devaluing it. (Yes, I know that’s not exactly how it works in the ideal case.) In between are stocks, bonds, mutual funds, etc. The value of all of these things depends first on the financial health of the underlying commodity or institution, and second on the willingness of someone else to pay a similar price for the security that you did. Thus, their values are heavily influenced by the health of the economy.
Investments that are even less risky involve CDs, money market accounts, or savings accounts. These maintain their value and accumulate some interest as long as the bank remains solvent. However, it is important to note that there really is no asset backing these accounts. The bank loans your money to someone else almost immediately upon deposit. All you’ve really got is a promise that they’ll give you your money back at a later date. An IOU.
All of these investment vehicles are unsatisfying to me. I’ve personally seen ups and downs in the economy. I know enough about history to know that crashes will come and many people will lose big. All of these things maintain their value if and only if the economy stays robust. Call me excessively risk-adverse, but that’s not a gamble I want to rely on.
What then?
There’s always real estate. It’s tangible, finite, and virtually indestructible, things that make it very different from T-Bill, for example. However, just like other securities, you need a buyer to realize your investment. Not to mention the fact that land is expensive. Getting financing and paying a good chunk of your profit to a bank defeats the purpose.
Gold? Precious metals? What value do those have? Gold has historically been used as a medium of exchange, presumably because it is rare, malleable, and pretty. It’s not really used for anything, so only the tastes of society cause it to have any value at all. It’s only difference from fiat money is that we can’t easily make more of it. An important difference, yes. However, the prime similarity remains - you can’t eat it, wear it, or use it for anything at all. It only has value because everyone has decided it has value.
Anything else? What did I miss?
Why do we need to invest anyway? So we can be rich when we are old? So we can live in a better nursing home?
When I get old, I want to live exactly like I want to live now, at home with my farm and my family. I will not work my entire life to save so that I can get the best possible care in my future vegetative state. I won’t be a burden to myself, my family, or society in that way.
When I look at things that I think are going to hold their value over time and that have value to me, I end up settling on things like books, tools, livestock, ammo, land to live on and farm rather than to own for speculative purposes, etc. The lifestyle I want is self-sufficient, low expense, quiet, and peaceful. I need money now, to accumulate the items necessary to make that possible.
Why buy stocks when I can use that money to move a step closer to that goal today?
Comments
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Why buy stocks when I can use that money to move a step closer to that goal today?
With the goals that you outlined in the paragraph above that sentence I can’t think of a single reason you should.
Dbltap | 9/27/2007 04:19 PM CDT -
My only thought would be that you buy a little gold now, and hold onto it, so that when those “items” wear out or break in the future, you can sell the gold to be able to replace them.
(Mr.) Kim du Toit | 9/28/2007 02:14 PM CDT
