Investing

Stocks, Bonds, Assets and Debt

 

I never learned about investing when I was younger. My parents were young and they weren't taught anything, either. If they even thought about it, they probably figured their children would learn something in school. Not so. Even today investing is not part of public school curriculum. So for the Millennials and newer generations I will provide a crash course and a few thoughts for the future.

Money - is immutable, has scarcity, is tangible, can be used as a store of value, i.e. gold, silver, land.

Currency - created by governments, banks, etc. Not a store of value and only backed by your faith in the body that created it.

Most people today become wealthy by receiving an inheritance, investing in land or investing in businesses. There are many ways to "make money" in real estate but the barrier to entry can be quite high. It is worth learning about so google it but I won't discuss real estate ventures here. Investing in businesses is accessible to most. You can start your own business from scratch, buy a business or purchase a piece of an existing business. I will talk about the last one.

Businesses need funds from time to time for a variety of reasons. They can get the funds by borrowing from others or by selling a piece (a share) of the company (take on other owners called shareholders). They can borrow funds from a bank or investment company, from friends and relatives or from the general public. They get the funds from the public at large by issuing bonds (I.O.U.'s). 

Bonds - Come in many forms but generally you lend funds to the business and they give you a promise to pay those funds back at some point in the future, with interest. They have to compete with other companies and governments for your business so the amount of interest will depend on a number of variables, such as...

• How long do they have to pay you back.
• How many payments along the way.
• How risky is the company (will they default?).
• The prevailing (Fed funds) rate.
• How badly they need the money.

Note: the bond interest rate = the bond yield if the bond is held until maturity.

There are rating agencies that assess businesses and governments. If the business is highly rated (a so-called blue chip company) you will earn less interest because it's not as risky to lend to it. Governments, especially federal governments, are usually (but not always) lowest risk. High risk bonds are called junk bonds. The shorter the loan, the lower the risk therefore the lower the interest you will earn. You can also "make money" by selling your bond to someone else before maturity (when it's due to be paid back) because bonds can usually be bought and sold on the open marketplace. 

There is a lot to consider when buying and selling bonds but the key relationships to the country's prevailing interest rate (the Fed funds rate) must be kept in mind. If prices in the country rise OR if the central bank of the country prints more currency, you will get inflation. This means it will take more currency to buy the same amount of goods. When this happens, central banks will often raise interest rates to try to reign in the inflation. Bonds that have already been issued will be worth a little less. This will also affect the bond's yield if it is not held to maturity.

To recap: Fed funds rate UP, bond price DOWN (and vice versa) and bond yield will change in the open marketplace.

Bonds tend to be "safer" investments (this usually means lower returns) than stocks but not always. You can purchase bonds using very little funds but make sure you learn all about them before investing.

Stocks (shares) - you can own a business by owning shares in that business. If you own the most shares then you also control that business. Most, but not all, businesses have shares available that can be purchased on the open marketplace (the Stock Market). Once you have at least one share in a company you become part owner of that company and usually will have a vote in that company. So you can be a part owner of Apple or Ford, etc. You don't need a lot of funds to purchase most shares although some companies are very popular and therefore their share price can be quite high, i.e. Amazon price today is $3,245.00 U.S. per share. Most share prices are much lower. You usually have to purchase whole shares but if the price is too high you can buy mutual or exchange-traded funds at a lower price. These funds are bundles of company stocks (shares) that offer a low unit price for entry.

You "make money" by buying the stock and holding it in hopes that the share price will go up over time and then selling it (capital gains). Many companies, if they are established and profitable, will also pay dividends. This means they are paying some of the profits for the year out to the shareholders. Gains or profits in mutual and exchange-traded funds are called distributions. People have come up with lots of ways of investing or trading on the Stock Market. They are all variations on the above theme. You can become wealthy by letting your currency work for you by buying shares of other companies or you can become much poorer. It all depends on luck and on how much you want to investigate before you invest. The thing to remember is that share prices are always changing. Constantly moving up and down. There is always a risk that any company's share price could plummet and never recover.

The sanest way to invest is to regularly buy shares of great companies that pay dividends and hold on to them for a long while. Diversify for greater protection from price swings.

People like to invest in companies because the potential return is much greater than putting it in a savings account at a bank. Also, when you earn interest, dividends or capital gains you must pay income taxes. The income tax rate is usually highest on interest followed by dividends followed by capital gains. Savings accounts earn interest.

Now for the tricky part...

The stock market is highly manipulated. The big institutional players, the ultra-wealthy and insiders have a big bag of tricks that they can use to improve their odds over everyone else. They have also gotten laws changed over time to further improve their odds but not yours. They generally win and everyone else generally loses. When you go to a casino the odds are in favour of the house. The house always wins. The big players are the house. Remember, the stock market is a zero sum game, for you to "make money" someone else has to lose it. The big players seldom lose. For regular folks, follow my sane way to invest as stated above, if you dare.

The stock market has been in a long term bull market. A very long bull market. This is unusual. It has happened for a variety of reasons. The biggest reason is because of MMT (modern monetary theory) and central bank intervention. These are important manipulations to be aware of and to learn about but I won't go into them here. This current bull market can implode at anytime and there is plenty of room for a large drop. There is a lot of volatility these days because the world's economic situation is in dire straits. It is not likely to improve.  A company's share price used to be based on business fundamentals (how well it's run, how profitable, etc.). That is often no longer the case. There are many companies that enjoy a very high share price even though they have never made a profit (especially true of tech companies). If you enter the stock market you do have to pay attention and be careful.

Currently, the only game in town is the stock market. As stated earlier, it is enjoying a long term bull market. Institutional players usually prefer bonds over stocks because they are usually safer. These days, though, the bond yields are way too low because interest rates have been held low for quite a long time now. So they are piling into stocks (another reason for the bull market). This is going to create huge problems when the stock market drops. This is another big reason why central banks manipulate the market...to delay the inevitable.

Personally, I think hard assets (like farmland, gold, silver, etc.) are best for investing. Land is harder to acquire but precious metals are easier to get into. Hard assets are often overlooked, especially precious metals, because people don't consider them to be investments. They hold value and they provide a great hedge against inflation. Many people don't understand why gold is so important so I will give you an example...

 

        If you paid for a year's tuition to Yale University in 1935 it would have cost about $1000 U.S. back then or you could have converted about 1300 grams of gold to get $1000 to pay the tuition. Today it would cost you about $56,000 U.S. for a year or 1020 grams of gold! That's right, if you earned 1300 grams of gold back in 1935 and lived to be able to go to Yale today, you would easily be able to afford it. Not so, if you earned a thousand bucks ($1000 then is approx = $19000 today, taking only inflation into account). 

Currency loses its value over time, hard assets generally do not. No matter how you earn your currency always try to convert as much as you can to hard assets. Land that you can grow food on will always be valuable!

Finally, avoid debt! The single most important thing you can do to achieve a good quality of life is to stay away from debt. Debt-free = freedom. If you must take on debt (consider it carefully) then insure it is good debt. Good debt is debt that will help you "make money" and improve your net worth. Borrowing to buy an apartment building that you can rent out to make a profit is an example. Borrowing to get a college education used to be considered good but I'm not so sure anymore. Bad debt is used to purchase depreciating assets, like a car...not good unless that car is used to make you a lot more currency than you will spend on it. Owing currency on credit cards is really bad. You can use them just don't carry a balance owing on them. The rich use debt to buy appreciating assets, the poor use debt to buy depreciating assets.

Remember, you need a lot less than you think. Hope this info helps. Cheers.