Today, we’re going to ignore the news. Instead, we will be giving you a crash course on money.
Over the next few days, we’ll talk about what we know…or think we know…on the subject.
Money has its digital side. In one sense, it is pure numbers…as boring and as predictable as long division.
But there’s a snakier side to it…and an underbelly as nuanced and subtle as humanity itself.
Few subjects — save perhaps religion and politics — are as full of puerile balderdash and self-serving claptrap.
But neither religion nor politics produces such clear winners. When it comes to wealth, just look at who has the most money!
What we’ll cover…
Today, we’ll look at money in the broadest possible way.
What is it? Where does it come from? If you want more of it, where can you get it?
In the days that follow we’ll take up some other issues too:
1. The macro context — What kind of a financial world do we live in now? How did it get this way; where is it going?
2. Investing in stocks — What do we really know about stock market investing? Are there proven techniques you can use to earn safe, above-market gains? Or are you better off just sticking with the indexes?
We’ve covered this in previously. But we’re going to revisit it just to make sure we got it right. We’ll also point you to the most successful stock-pickers in our business.
3. Investing for income — Not everyone wants capital growth. Some people are more interested in income. How do you make your capital work overtime for you?
4. A five-minute retirement financing audit — We’ll figure out (a) how much you need, (b) how to get it, and (c) how to make sure it doesn’t run out before you do.
5. Options, trading and other tricks — How to speculate for fun and profit.
And whatever else we can think of that might be useful to you…
Money = wealth?
But let’s begin with money…
We all know what money is, don’t we?
Well, actually, no one knows. Is it something real…unreal…tangible…ethereal?
Does it represent wealth? Or is it wealth?
And you, what do you really want out of money? Is it money you really want, or the things money buys? How much do you really need? Is it better to have more or less?
Some readers will find these questions unnecessary. But if you really want to draw the measure of something, you have to look at it from different angles.
It is like getting to know a woman. You can’t just meet her at a few parties. You have to be with her in the morning and the evening — in good times and bad. You need to see how she holds up under pressure.
That is the key question for your money, too — how will it react to pressure?
Money didn’t exist until the first civilization. There was no need for it before then. What could you do with it in a pre-civilized world? Money emerged as a way of exchanging and preserving wealth. It was critical to the development of modern market economies.
In a subsistence economy you grow enough food to support yourself and your family. You may trade chicken for pork or grain for fruit, but money is scarcely necessary.
As the economy becomes more complex, money makes it easier to trade. You could sell some corn for pieces of gold…and then use the gold to buy an axe.
Money represents buying power. It is a convenient way of keeping track of who has what.
But imagine you grow enough grain for two years in one glorious and bounteous season. That extra grain isn’t needed for current consumption. Instead, it is capital. You can sell it for money.
That money represents a year of your labour — which you can now invest in something else. The point (an important point, as we’ll see tomorrow) is this ‘money — it could be paper, gold, tobacco or almost anything — stands for something real.
In this case, it is a year’s worth of grain. It is a resource that makes further growth and capital formation possible.
Two kinds of money
There are two kinds of money. There’s the money you need to spend just to stay in the same place: your annual earnings and expenditures.
And there’s the money that holds a place for your savings. This is money put aside — or capital. It is this latter money that we are usually talking about when we talk about investing.
Typically, you’ve earned this capital by the ‘sweat of your brow’. But now you want this capital to do some sweating too.
How can you put it to work?
Well, instead of planting and reaping, as you do every year, next year you could spend your time clearing more fields. That way, when the time comes for planting and reaping the following year you’ll have twice as much land available…and produce twice as much grain each year.
That’s a tremendous payoff. A 100% profit in the first year…and every year thereafter…
But suppose you can’t reasonably increase your growing space? Suppose you can’t increase your output? Suppose you don’t know what to do with the money?
Don’t worry. It’s time to invest!
Someone else will probably need that grain, so he can lay off planting and reaping long enough to improve his output.
Now, it’s getting interesting. Your capital has a value to other people, not just to you. It makes it possible for them to be more productive.
But now, you have to get up on your toes as an investor. It’s time to ask some questions.
Do you trust the guy you’re giving your money to? Is it a loan (debt)? Meaning you get a fixed rate of return plus your principal back after a preset time? Or will you get a share of the business (equity)? If he doubles his output, how much do you get?
Ooh la la…now you’re getting into some serious questions.
If it is a loan, what is the collateral? What happens if the borrower can’t repay? Are there safer, higher-yielding borrowers? If it is equity, what share of the business do you own? Is the CEO a proven winner? What is his track record?
And what do you do with your shares? Can you sell them to someone else? To whom? At what price?
And if you sell, what will you do with the money you get in return?
We will answer all of these questions in the next few days. You will see that our economy has become much more complex. But the questions are essentially the same.
If you want more money, you have two choices: You can work for it. Or you can put your money to work.
This series is about putting your money to work — how, when, where and with whom.
for The Daily Reckoning Australia