What is investing?

Investing implies giving capital to a person or an enterprise so that some actual product or service is created incrementally, benefiting the person, enterprise and in some way, all of us.

The low-risk version of this is lending money, because you are guaranteed to receive the money back (in theory). The safest form of this is lending to the government because they can always pay you back ;) But because it is safe, you will not get much more than your original money plus some interest.

The higher-risk version of this is buying equity. You need money, gimme a piece of your company. I may not get any money back if you fail, but when if succeed, I can get way more than I gave you.

There is NO other real way to invest. I hear sophisticated business acquaintances talk about investing in derivatives and CDS products; structured notes; etc etc. They are all gambles. But there are two types of gambling:

1. Hedging:  If I have a house and I do not want to lose everything if it burns down, I take an insurance contract. It is a derivative instrument as what it pays depends on an extrinsic event. Someone takes the risk, I pay them a premium.

2. Gambling: If you have a house and I want to make money if it burns down, I take an insurance contract. That derivative is a gamble. This is what a credit-default swap, or a CDS is.

Neither hedging or gambling is an investing activity. The hedge has the legitimacy of serving to protect an actual asset, an actual investment. The gamble has no redeeming features. This does not mean I have a moral position on gambling - I just think a spade should be called a spade.

It is difficult to clearly separate hedges and gambling. For example, maybe my livelihood as a stocking-vendor somehow depends on your house being the chick-magnet. So maybe that insurance on *your* house may make sense after all.

But no matter: it is easy to separate investing in securities or assets from everything else. Unfortunately, the financial press shocks me everyday using these terms fungibly.

Fertile material

It took less than 5 minutes after initiating this blog to stumble upon:

At Tiny Rates, Saving Money Costs Investors

"The elderly and others on fixed incomes have been especially hard hit. Many have seen returns on savings, C.D.’s and government bonds drop to niggling amounts recently, often costing them money once inflation, fees and taxes are considered."

Imagine I retire with savings, enough to last me 30 years, at today's cost of living. In a more sensible monetary policy environment - one that did not only exist to benefit credit creation and support a borrowing culture - I would not have to think of whether it would suffice over the period I expect it to.

Confused? Go back to Rome, when Nero was supposedly fiddling around. (According to the General Book of Ignorance, this thing about Nero is a complete myth). You saved 100 gold coins 50 years ago. Successive emperors debased the coins so that there is only a fifth of the gold left in each coin issued today.

Guess what - you can also split each coin by 5, and presto you have 500 coins. Zero inflation.  Of course you could not really have done that, it would probably have gotten you a good flog or even a secular crucifixion.  But assuming people were sensible - which is an assumption all economists make anyway - people would have understood that your coin is worth 5 new ones. The value inherent in your savings is intact.

That still leaves us with other unanswered questions that an economist would ask.

Q. Why can't you invest the money yourself - you don't have to be inflation's slave nor the bankers'.
A. Can the average citizen really invest in things other than property and simple savings product? Ask the sophisticated fund managers who lost (their investors') shirts on the alphabet soup of the first decade of the 21st century.

Q. But keeping it home only costs depreciation equal to inflation, why take risk and lose it all? You still have a low-risk option. Buyer beware.
A. To this, you have to answer: dear economist, have you heard of keeping up with the Johnsons? When the whole world is doing something it is very hard to be contrarian. Economists should know this, if there were a bunch that blathered unthinkingly in unison, it is them.

I too try to invest and make money. I however do not believe the markets are efficient; that humans are rational; or anything else. I do it because I do not want to lose out sitting on cash. But I know I am frankly gambling and hoping to be slightly more intelligent - or luckier - than the next guy.

I wish the financial sector and the freshwater economists who encouraged them would be as humble.  Oh wait, if they were, they'd have no value proposition, no job and no respect.

Smug bug

I recently got together with two strangers: a charming young boy of maybe 26 with a speech impediment and a self-righteous twat of maybe 26 as well.

The twat, of course, was an economist. Ironically both of them were put in touch with me by their mentor, an economist running a think tank in an emerging economy, who was far humbler than his protege-twat.

We went through the usual stuff one always does with an economist who is sipping Sprite:

1) We just try to "maximize" a function. And that function need not be GDP.

2) If you don't like the system, don't invest.

3) When the recently-turned-banker self-deprecatingly said he didn't really think he was worth what he was for selling bonds: "But that's your marginal productivity and so you deserve it"

Because of these types of people, I have decided to start a new blog. And here is the first entry.

1) You can try to maximize and minimize all you want, and call yourself an economist of any stripe - labor, welfare, social, political - but your science is more "social" than "science". You could do everything you do today and make me gush with warm feelings for your ilk if you simply admitted for one moment that you cannot predict the economy the way I can predict how long it'll take an apple to hit the ground from 10 feet, not even to the flawed Newtonian precision. Instead of proudly declaring other aspects of life - such as social stability, pets and love - irrelevant to your maximizing function, declare it humbly and admit that you cannot model any of those, even though people are trading off between those and "money". Welcome to the real world.

2) I can't take really take my money out of the system, you stupid cunt. (Actually I am largely in cash, but more due to laziness). If it were a gold-backed currency whereby the printers of money cannot continuously debase the currency, I would love to keep my ounce of gold at home. Fiat money and the "desire" of central bankers to keep "moderate inflation" - which is protecting borrowers at the expense of savers - mean I do not have an option but see my money depreciate in the bank or get wiped out every time the system blows up. Also, deflation is not bad, it is only frowned upon because it hurts borrowers and we are so addicted to credit we cannot fathom an alternate world view. And no matter how you trumpet buyer-beware, the fact is that millions of people have no individual control over their money and the securities it is invested in. This is why there is no real challenge to the corporate / managerial plutocracy from shareholders today. Institutions that manage that pension money, your savings, etc, not always maliciously, have destroyed great wealth because they are simply not capable of standing up the way an actual shareholder does. If you invested, you'd do it solely to see returns - you're not going to be paid to invest your own money. They get paid a salary. A big fat one. I can't see the alignment of interest. So please do not tell me to take my money out of the system.

3) Tulips. To everyone who comes up and says a) a banker's salary is a direct result of his productivity and b) the market has judged that his marginal productivity is ___. Please shut them up by pointing out no one really still knows what the productivity of an extra bulb of tulip was but it sure did not stop them from selling their homes to buy one.