MarketInsight | Why we invest
People talk about investing all the time. People love to tell me about investments they have made, particularly the successful ones. They talk about investing in real estate, precious metals, bitcoins, and even stocks. Sometimes they talk about investing in themselves. That can mean anything from buying new clothes or a car to getting an education. Most people will tell you that an education is a good investment. I concur. I have also heard people talk about investing in things like boats and recreational vehicles. A boat is not an investment. A boat is a hole in the water, surrounded by wood, into which one pours money.
Some of the things that people think are investments are not really investments. Benjamin Graham, who taught Warren Buffett at Columbia defined it this way: “An investment operation is one which, upon thorough analysis, promises safety of principal and an adequate return. Operations not meeting these requirements are speculative.” Therefore, investments need to provide the promise of two things: safety of principal and an adequate return. Not every investment you make will deliver those two things, but you need to enter in to them with expectation that, over time, they will provide both.
Time is another key factor. We do not buy investments with the expectation of making a quick return. When we buy something expecting to flip it for a relatively small profit over a short period of time, we are speculating and not investing. There is nothing inherently wrong with speculating, you just need to realize that is what you are doing. You also need to realize that speculating is no substitute for investing. You need to invest for your future.
My investment expertise lies in the stock market. People talk about investing in stocks, but what does that mean? What is a stock? When people talk about stock they are usually talking about Common Stock. Common Stock is traded in shares. Each share of Common Stock represents an ownership interest in a Corporation. When you buy a share of stock, you are buying an ownership interest in the underlying Company, albeit often a small percentage ownership. If you were to buy 100 shares of Coca-Cola, for instance, you would own one-42.5 millionth of the company. Not enough of an interest to have any say in what the company does, but still enough to share in the profits of the enterprise.
So, why buy stock? You need to buy stock because these huge companies will shape all our futures. We hear it said again and again that multinational corporations have too much power. That is probably true, but it is all the more reason that we need to be invested in those companies. We live in a world where jobs are becoming more transient and where we will be asked to provide for our own futures. Fifty years ago, it was possible to live in retirement, and live reasonably well, without any long-term savings or investments. Those day are gone forever.
Scott A. Grant is President of Standfast Asset Management in Ponte Vedra Beach. He welcomes your comments or questions at email@example.com.