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Investing
By John | October 9, 2009
If I tell you I invest in land, what is your vision of what I do? Most people think I buy land in a metropolitan area in the path of progress, wait for new development to reach my land, then sell it for a profit to a land developer. That’s not only not what I do, that’s not even investing. It’s speculating.
So, what’s the difference?
In a capitalistic economic system, “investors” are those who allocate capital so that it is most productively utilized. Capital is “put to work” so that it might produce a return to the investor.
Now, when you buy land in the path of progress, then wait for circumstances to make your land more valuable, are you putting your capital to work? No! Your capital is waiting idly on the sidelines. It is unemployed!
If you buy gold, are you investing? No. Gold is not an investment. It may be an insurance policy against hyper-inflation and, as such, may be a wise move. But make no mistake about it, that is not an investment. Your capital is waiting idly on the sidelines, producing nothing.
If you purchase a home to live in, are you investing? No. The home you live in is an expense, not an investment. Your capital is not only not producing anything, it is depreciating, as the home depreciates. I know some still believe a home can be an investment, even after our recently popped housing bubble. This was an example of speculators chasing the latest asset that is increasing in price. The speculators are seeking a quick buck. But if nothing of value is being produced, this is a zero-sum game. You may have some winners and some losers, just like you do in a casino, but your capital is not working for you. Your capital is being gambled instead of being put to work.
Many people have believed their home to be an investment because they believed they sold it for more than they paid for it. In many cases, however, that “gain” represented a decline in the value of the dollar, not an increase in the value of the home.
If you buy stock in a company, are you investing? Hopefully, yes. Why? Because you are allocating your capital (either directly or indirectly) to the management of a viable enterprise - one that creates wealth through the production of a good or service that the public values and will voluntarily purchase, generating profits for the company and its investors.
This is not to say that no one speculates in the stock market. Many do. Traders, for example, are doing nothing more than betting on the price direction of a stock. They are not allocating capital to a productive enterprise. Many of the “products” that Wall Street creates are not legitimate investments. There has been an explosion of new derivatives recently. Most benefit their creators at the expense of their purchasers.
Warren Buffett is a well-known stock investor. He allocates capital to deserving enterprises that, in turn, generate profits for Warren. That homeless guy you just saw sitting under the expressway overpass? He was a speculator.
You see, to be invested, the capital must be employed along with labor to produce something of value - it must be put to work.
In my book, Investing in Vacant Land, I make the clear distinction between investing and speculating. I advocate investing. I advocate “working your land” after you own it - doing something to add value to that land. Otherwise you are just speculating and, as I state in my book, investors make money because they deserve to make money and speculators lose money because they deserve to lose money.
Know the difference between investing and speculating. Then only invest.
Topics: Commentary |
October 13th, 2009 at 9:59 pm
Very interesting and amusing subject. I read with great pleasure.