What we know about money

Dec 11, 2014

New York, New York

Dear Diary,

Dow down 268 points yesterday. Gold lost $4. We're keeping a desultory eye on it, confident that nothing is happening worth watching.

Besides, today, we're going to ignore the news. Instead, we will focus on 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...pure math, as boring and as predictable as long division. But there's a snakier side to it. And a bottom 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. Just look at who has the most money!

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?

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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 their 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 previous Diary entries, 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. Income investing ....not everyone wants capital growth. Some people are more interested in income. How do you make your capital work overtime for you?

  4. A 5 Min. Retirement Financing Audit...to 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.

But let's begin with the subject itself - money. We all know what money is, don't we? Well, actually, no one knows what it is. Is it something real...unreal...tangible...ethereal? Does it represent wealth? Or is it wealth itself? 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 relatively recent times. There was no need for it before. In a pre-civilized world what could you do with it? 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. You may trade chicken for pork or grain for fruit...but money is scarcely necessary. As the economy becomes more complex, however, 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 purchasing power. It is a convenient way of keeping track of who has what. But imagine that you grow enough grain for two years in one glorious and bounteous single season. That extra grain isn't needed for current consumption. Instead, it is capital. You can sell it for 'money.' That money represents a whole year of your labor - which you can now invest in something else. The point - an important point, as we'll see tomorrow -- is that 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.

There are two kinds of money. There's the money you need to spend just to stay in the same place...your earnings and expenditures on an annual basis. And there's the money that holds a place for your savings...money put aside...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? 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...so that 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. At a price to earnings multiple of 10, this represents a 'ten bagger,' with a capital value equal to 10 times your original savings.

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 own 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, as an investor...you have to get up on your toes. It's time to ask some questions. Do you trust the guy you're giving your money to? Is it a loan...or will you get a share of the business (equity)? Will you get a fixed rate of return...a guaranteed return? If he doubles his output, how much do you get?

Oh la la...now you're getting into some serious questions. If it is a loan, what is the collateral? What happens if he can't pay? 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? Then, 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?

All of these questions we will take up in the next few days. You will see that our financial system 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... stay tuned!

Bill Bonner is the President & Founder of Agora Inc, an international publisher of financial and special interest books and newsletters.

Disclaimer: The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

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1 Responses to "What we know about money"

KD

Dec 11, 2014

Read "Rich dad poor dad" by Robert Kiyosaki!!!

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