The investment game, Inflation and the cost of goods.

[Vanraw]

Under the rule of the Roman Empire at the time of Christ (1st Century AD), one ounce of gold would have purchased a Roman citizen his toga (suit), a leather belt, and a pair of sandals. Today two millennia later in the west, one ounce of gold will still buy a man a suit, a leather belt, and a pair of shoes. Nothing has changed.

Its an interesting quote. Its all relative. For example, if I buy a house for 200k and it increases in value 5% a year, in 5 years its worth 243k. 43k profit seems nice. But if I sell it, and take the 43k profit, and in turn use it to buy a better house, I wont get one. Because the same house for 243k 5 years later is the same house I just sold. So its all relative.

Same goes for just about anything. Even a fixed rate CD return of 4% will only keep your money worth the same buying power it is when you put it in.

So in general, investing is just like gambling in Vegas. Its all about beating the house. I'm beginning to wonder though if that's possible, in the long run with standard investing. Sure, the are examples of people wh have made millions in the stock market, but there are more stories you don't hear about of people losing millions. And if everyone is making millions, then at some point there is always a big ole nasty correction. It happens all the time.

So beating the house is about timing. Timing the dips and timing the peaks. Calling the bottoms for me, has always been a fools game. The house always wins in the long run.

So what are the alternatives to gathering and keeping wealth? Meaning if it wasn't for real estate, Interest rate based investment, or stock market investment, what are the real alternatives?

I'm beginning to think that investment into small private businesses is the way to go. Enter the community and back strong business plans.

[Dustie]

Very interesting. I don't have any answers besides my usual, I think Buffet style long term investing will always win out.

I like the ounce of gold story. I'd also like to see a graph of "<years of labor for an average worker> to <home price> ratio" chart going back 2000 years. =)

[Jakensama]

I'm all for spending too much money on clothes and have a really nice pair of italian leather shoes and a couple bespoke suits I paid far too much for, but $1217 can buy your average fashion ignorant American several shoes, several belts and a couple suits.

Not to mention that analogy is silly as 8 years ago the price was what, under 300? That'll ain't going to buy you a suit, shoes, and belt unless you shop at the menswear section of Wallmart.

But it is funny because the relative purchusing power is estimated to be about 15 bucks for a denarius at the beginning of the empire which puts gold at 1300 USD an ounce during Augustus' reign.

A 4% return on CD is also above the inflation rate so will yield at least some return but because of the safe nature of the investment was never intended to be a money making scheme, its a safe place to dump cash.

Proper investments just awareness of the world around you, there are always going to be opportunities and these will change with time.

To use your Vegas analogies, there are games to play in Vegas where you can push the edge in your favor or 50 50 like black jack or pai gow, games where, played skillfully, can net you a profit over a time like poker, and slot machines which are essentially taxes on stupidity.

Investings the same way.

[Hoofhurr]

I was wondering about this earlier. Where is value truly created? If you average out the total sum of all the monetary wealth in the world to include the boom and busts of the last 10 years and divide that number by the total number of people in the world do you get a number that is that far ahead of the per capita wealth of say 1920 or 1800?

If it is and I'm not sure that it is, where did that additional wealth come from? My guess is that 50% of it was extracted from the natural environment and 50% of it is somehow simply tied into the fact that there are more people on the planet. I'd say the vast majority of wealth in the world is simply the result of taking stuff from the earth and giving it to an ever increasing number of people. The two seem to be linked.

Isn't investment/banking/lending, just moving wealth from one person to another? A really complicated and probably not truly profitable way of redistributing the wealth? Where is value really created in that system?

The only thing I can see is that on the whole we have access to a better standard of living. Our health ought to be better and we ought not go hungry or homeless as much as someone had the chance of going in Roman times. We have more shit too. Some of which is nice.

I think this is a fairly linear view on wealth though. Prospecting, extraction, manufacturing, make more food, create better health, make more babies, live longer, rinse repeat. At some point that chain has to feed in on itself as we run out of new places to prospect and extract from and as we start to pay the true cost of the extraction processes and having so many people living on top of each other. We haven't even really begun to pay the penalty for that yet.

So ya, ultimately, I think a citizen of the US is better off than a citizen of Rome but that much better off?

Let me ask you this. Is it possible for everyone on the planet to be rich if they work hard enough? Why or why not?

[Breand]

So what are the alternatives to gathering and keeping wealth? Meaning if it wasn't for real estate, Interest rate based investment, or stock market investment, what are the real alternatives?

Save more? Compound interest is your friend. The more you save, the more interest you collect, the more you earn. Having a successful small business is a good alternative, but who wants that headache? Sure investing in one may work too, but I'm the kind of guy who would only trust himself to do something right, and not someone else.

It's all about risk versus reward of course. How much are you willing to put on the line to get more wealth? Me personally, not so much...so I pretty much invest everything in Index based mutual funds (keeps admin costs VERY low, and I know that people more stupid than me won't futz around with my money), and in PIMCO, because Bill Gross is god. I will happily take his 7.75% annualized returns with virtually no risk.

[Slamz]

I think you have to look at average quality of life rather than comparing sums of cash.

If everyone in the world was given $1,000,000, all it would really mean is that $1,000,000 isn't worth very much anymore because everyone would have it. Similarly, if we dug up a bunch of gold and handed everyone in the world one gold brick, all it would really mean is that gold isn't worth much because everyone has a bunch of it. It wouldn't make you rich, it would just make gold into the new copper.

What you'd have to look at is quality of life. If everyone in the world goes from living in a shack to living in a mansion, then in terms of wealth, mansions are the new shacks (and the wealthy would be living in castles and palaces and looking down on the plebes in their mansions). Relative wealth didn't change but overall quality of life improved.

I wish I was rich enough to do more in real estate. While the real estate market can crash in terms of relative wealth vis a vis what I paid for it, a house is still worth a house. It represents a certain quality of life and a nice house is going to be an improvement for enough people out there that regardless of what happens with the dollar or the stock market, I will have this thing that represents a real quality of life improvement over what a lot of other people have. It may one day only be worth $20 but it will still be worth twice as much as the single occupancy condos down the street.

"Things", I think, can make good investments because ultimately they represent work. Here's a thing that represents 500 hours of work. Maybe you paid $40,000 for it. Well the economy crashes and now it's worth $400, but it still represents 500 hours of work and you can trade it for something else that represents 500 hours of work, regardless of what happened to the dollar value.


So with that in mind, I tend to like "things" -- houses and gold are good things. Whatever happens to gold, it will always represent an amount of work. Stocks and savings accounts and other intangible items that are basically based on the current value of money seem like more dubious ways to go, long term. A house or a pile of gold is a thing that's always going to be worth the value of a thing, but 1000 shares in EMC seems to me like an intangible value where you are simply gambling -- the gamble is that you can cash out and turn it into a thing before you lose it. It's not real value until you get it out of the stock market and turn it into a thing.

(And real estate is still a pretty nice thing, if you've got the money and time for it. People will pay rent to live on your property but they won't pay rent to look at your gold.)

[Vllad]

The value of a house in California is driven by the cost out stripping the common salary.

In Cali the way a 50k a year job pays for a 800k house is because of the bubble interest loan. It works like this:

I buy a home for 300k and don't pay any interest the first 2 years. The payment is fairly reasonable however after two years that payment gets beyond a 50k salary. So instead they fix the home up and try to sell it for 320k before the 2 years is up. Once they sell it they take the extra cash they made on the house and put a bigger down payment on a 400k house. Payments with out interest the first two years is about the same as your previous home because of the bigger down payment. If I sell that in two years and make 30k more I continue on. Rinse and repeat until I have a big enough down payment to buy a home that I can afford the payments on a 50k salary.

This in return makes the market seem like it has more demand then it really does and drives the cost of homes way up. Because of Prop 13 this works really well until the economy takes a dump and kills everyone. That is why the cost of housing in California is out of control and why the state is bankrupt. Prop 13 which sounded good in 1977 really sucks today.



What I love about Buffalo is the market only goes up about a half a point a year. In the last 50 years it has never gone up more then that. The good part about that is it never goes down. Even in this last market plunger Buffalo just stays nice and steady.

I prefer the Buffalo market to the Los Angeles one every time.


Vllad

[Dustie]

Let me ask you this. Is it possible for everyone on the planet to be rich if they work hard enough? Why or why not?

Do you mean equally rich? Or just rich? And if the second, I think we need to define rich.

I've thought about this before. As a datapoint, if we divided up the current household net worth of the US (54 trillion last time I checked) that would leave each person with 176,000 bucks. So a family of 4 would have a net worth of about 700K. If we did a similar thing to income, each person would make about 42K per year (assuming everyone from age 0.1 to 105 worked). Is that rich? Now of course that's for the US, one of the richest countries in the world. I don't have the numbers to expand this out to planet earth as a whole but obviously the numbers will go way down, maybe by 10 times or more. Of course, continuing to think along these lines will get you labeled a commie pinko so I will stop here.

What are you Hoof? Some kind of commie pinko?

[Breand]

who would mow our lawns?

[Hoofhurr]

Nah I just think it's funny that one of the American dreams is to become rich through effort and work but what would the country look like if everyone worked their asses off to become rich and actually achieved it. What would that reality look like?

Maull is making the argument that wealth is relative and how wealthy one is must be tied into how not-as-wealthy others are. That basically concedes to the notion that not everyone can be rich in the monetary sense and wealth almost needs to form a pyramid to be defined.

Slamz makes the argument that true value is found in things that take work to manufacture but things that took a shitload of work to make like the first car, now take a good deal less work to make because of technological advances which is why cars tend not to hold their value as well as houses but sure seem nice if you've tried to bike to work recently.

Where do our individual goals reconcile with what our goals are for civilization? I forget sometimes. Is it take care of you and yours and then worry about others?

I think so much of wealth is relative and quality of life is relative too. Do you think Americans would be happier if you could 'imprint' them with having lived in 1400s poverty like Neo was 'imprinted' with the knowledge of Kung fu? Imagine that. I think a lot of people's self worth is derived from a sense of progression in that you ended life 'ahead' of wherever you started it. What if we could just manipulate people's life experience so that everyone started out as a slave in Egypt 300bc or something and then we transported them to modern day America. People would be like, "Damn my life is pretty good."

Getting a college education and a decent job is an awesome accomplishment if you're the first person in the history of your family to go to college. If, however, both of your parents are MDs and own their respective private practices you look like a big dousche. Why is that? Doesn't the accomplishment hold the same value?

What's the deal with Master's degree being the new bachelor's degree? What happened to the value there?

I think a lot of these notions translate into MMOGs in interesting ways as well. Some of the Eh team once expressed that they derived their enjoyment from MMOGs precisely because of the feeling of progression that the level grind seems to invoke. The feeling that you can one shot a froglok that once kicked your ass is part of the 'it' that they were paying for.

[Slamz]

I call this the "Relativistic Environment Principle" -- basically what Maull said. If everyone in the country worked their butt off and became rich, we would still find something to bitch about. I'm poor because my mansion is only 18,000 square feet and plated in silver while my neighbor has 20,000 square feet and gold plating. "Poor" is simply relative to what other people have.

It reminds me again of that story about a documentary on poor people in America. The cold war era Soviets got a copy of it and aired it to their citizens to show that things were bad in the US but it actually made the people angry because they saw that even dirt poor Americans still had TVs, cars and were fat.

The quality of life of a poor person in America today is many times superior to the quality of life of a poor person in America in 1750 (and is certainly better right now than the life of a poor person in China) but we just find new things to bitch about. Used to be you were poor if you froze to death in the winter. Now you're poor if you have gas heat, indoor plumbing and a car, but it's not a very good car and you don't have health care coverage.



So I think the answer is that if everyone worked hard and got "rich", there would still be rich vs poor, but the average quality of life would be that much higher.

[Diggles]

who would mow our lawns?

Robots that we buy with our money, that are built and assembled in poor countries with the resources and manpower. But since we had all that free time from not having to mow the lawn, we had time to invent a robot to do it.

[Dustie]

I derive the answers to most of these questions with three things:

1. Perspective

2. This idea:

As I’ve traveled across the globe for nearly six decades, I have found that people exhibit remarkable similarities that by no stretch of the imagination can be construed as resulting from culture, history, language, or chance. All people appear motivated by an inbred striving for self-esteem that is in large part fostered by the approval of others

(how much money do you spend on things simply to gain the approval of others? -- big house, car, Italian leather shoes, etc)

3. and this idea:

Sucess is getting what you want and happiness is wanting what you get

[Vanraw]

I derive the answers to most of these questions with three things:

1. Perspective

2. This idea:

As I’ve traveled across the globe for nearly six decades, I have found that people exhibit remarkable similarities that by no stretch of the imagination can be construed as resulting from culture, history, language, or chance. All people appear motivated by an inbred striving for self-esteem that is in large part fostered by the approval of others

(how much money do you spend on things simply to gain the approval of others? -- big house, car, Italian leather shoes, etc)

3. and this idea:

Sucess is getting what you want and happiness is wanting what you get

That third one is a good quote Dustie. I think there is another piece in there as well. Knowing what happiness really is. This falls into the competitive striving of everyone to have the better car and bigger house then the neighbor. It doesn't necessarily bring happiness.

Slamz mentions that we are better off then the poor guy in China, but It think there is some perspective here. I'm not sure I know how to measure "quality of life". I think a Tibetan Monk's perspective of quality of life is allot different then mine.

- He who has the most toys when he dies wins.... ie Money = better quality of life.
- Quality of life through relationship fulfillment of family and love ones.
- Quality through commitment to a deity or way of life.
- Quality through dedication to a life mission, work, cause, etc.


Back to the original thought though, I think money / wealth is just constantly changing hands. In the sock market especially. If some one is losing, then someone is gaining. If someone wins, the money is coming from someone else. Its like energy. It can not be destroyed or created. Just transformed, condensed and or dissipated. This is at the Macro level. So if your luck enough to get in at the bottom, and lucky enough to get out at the top, you do ok. Your taking money from those who got in or out at the wrong time. Its all relative especially in the stock market.

But I'm beginning to think the best investment in our times, and for the next several years might be funding the small business directly. ie Buying stock in a private hardened asset that isn't at the whims of a bunch of money changers.

[Hoofhurr]

I generally agree with your perspective Maull. I think supporting the small business is definitely a way to go for many reasons. I was driving to work today and thinking along these exact same lines. I thought to myself that if I had a good big chunk of change I might go to a school like MIT and find some smart or creative person and offer to pay for their schooling and initial business ventures in exchange for some of the profits. I realize this is pretty much venture capitalism but wouldn't it be cool to be a part of something like that?

[Jakensama]

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hopefully you have a better idea than this guy

[Thudz]

That gold quote may have held true 10 years ago when gold was $200/oz. But today it's $1200/oz. You can buy alot more than a suit, belt and shoes for $1200.

[Dustie]

But I'm beginning to think the best investment in our times, and for the next several years might be funding the small business directly. ie Buying stock in a private hardened asset that isn't at the whims of a bunch of money changers.

I agree, but only if you're an expert in evaluating the prospects of the business in which you're going to invest. If you're not, then you're subjecting yourself to the base odds of small business failure rates (generally thought to be about 70% -- as in only 30% of new small business eventually turn a profit). Most of us are not good enough to do that (as evidenced by the fact that 70% of small business startups never turn a profit.

[Slamz]

- He who has the most toys when he dies wins.... ie Money = better quality of life.
- Quality of life through relationship fulfillment of family and love ones.
- Quality through commitment to a deity or way of life.
- Quality through dedication to a life mission, work, cause, etc.

I think there are some qualities of life that are fairly universal, though:
- Access to clean drinking water
- Access to quality (nutritional) food
- Access to proper waste and sewage disposal/treatment systems
- The amount of space between you and the next person
- Access to health care
- Access to transportation (if needed)

On those notes, we are undoubtedly better off than most of China.

We could improve all of these things and still have "poor people" but quality of life would be a lot better on average.

[Jakensama]

Interestingly enough Personal Space is highly culturally relative, not sure it would be a universal quality of life thing.

[Dustie]

Personal space is debatable. I don't think I'll comment until I speak with more people who have worked as the "shovers" at the doors of Japanese sub ways.

[Hoofhurr]

The Indian people drink and wash themselves in some of the nastiest water on the planet and appear to be ok.

[Vanraw]

- He who has the most toys when he dies wins.... ie Money = better quality of life.
- Quality of life through relationship fulfillment of family and love ones.
- Quality through commitment to a deity or way of life.
- Quality through dedication to a life mission, work, cause, etc.

I think there are some qualities of life that are fairly universal, though:
- Access to clean drinking water
- Access to quality (nutritional) food
- Access to proper waste and sewage disposal/treatment systems
- The amount of space between you and the next person
- Access to health care
- Access to transportation (if needed)

On those notes, we are undoubtedly better off than most of China.

We could improve all of these things and still have "poor people" but quality of life would be a lot better on average.

Ok Ill buy that, I would add one high level qulifier called

- Quality of life through a healthy environment.

It still falls into the perception aspect of things. For instance in America we cant drink water from a stream because our bodies don't have resilience built up against the the little bugs. So quality of life for drinking water in America is completely different compared to lets say, an American Indian 150 years ago. So the guy drinking from his own bathwater in India doesnt have an issue with his drinking water, but an American would.

[Slamz]

What's the rate of dysentery among natives of India relative to the US? I have no doubt that they're more resilient than Americans but are they really immune? Or do they just live with a higher rate of illness?

I was thinking more like industrial pollution though. There are surely places in India where even the Indians can't drink the water because if the raw sewage doesn't kill you, the runoff from the fertilizer plant and paper factory will. Clean water might not make you feel rich but I would think that polluted water would make you feel poor (in a "rich people don't have to put up with this" sort of way).


Maybe personal space isn't so much a "quality of life" issue but I bet just about every culture would consider you to be richer the more personal space you have. e.g., shack vs mansion, stretch limo vs public bus, big office vs tiny cube. It may not impact your quality of life in the sense that you live longer but I imagine there would be a perception that your QOL is better than someone who is the same as you but has half as much space.

[Jakensama]

I was thinking more like industrial pollution though. There are surely places in India where even the Indians can't drink the water because if the raw sewage doesn't kill you, the runoff from the fertilizer plant and paper factory will. Clean water might not make you feel rich but I would think that polluted water would make you feel poor (in a "rich people don't have to put up with this" sort of way).

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The birth defects dont help either.

Maybe personal space isn't so much a "quality of life" issue but I bet just about every culture would consider you to be richer the more personal space you have. e.g., shack vs mansion, stretch limo vs public bus, big office vs tiny cube. It may not impact your quality of life in the sense that you live longer but I imagine there would be a perception that your QOL is better than someone who is the same as you but has half as much space.

I'm sure most people prefer those things, but in many cultures its more of a luxury thing than some basic litmus test for quality of life. Its just not as important to every culture to really be placed on a list with other basic universal biological needs like sanitation and clean food/water. Nor with exploding populations is it something many societies can really ensure for future generations.

Its definately valued more in the US than here and in Japan its even more of a luxury than something needed for a good life.