Investments are like passenger seats in which to passively park money while receiving a solid return, more so than a place to actively drive it on a day-to-day basis like a business or occupation. Of course no investment is completely passive, but the idea is that it should only require a small degree of time and attention relative to the return.
Long term cashflow is my priority because capital appreciation will follow. As cashflow goes up, usually so does value of the underlying asset. Cashflow also continually reduces your skin in the game, lowering risk and freeing up capital for further use. Investments which offer strong cashflows are highly desirable.
Another important consideration is the degree of passivity. How far can the chauffeur drive your money well without requiring direction from you? There’s a spectrum between being a passenger and being a driver. The closer you are to the driving end the more concrete and operational it is.
For example, the customer wants a sandwich. If the owner has to be there it’s not passive. He has no chauffeur. The other end is more abstract and strategic, by allocating capital and evaluating financial constructs. Making decisions about where to go is the domain of the investor. Simply put an employee is a driver, while an investor is a navigator.
At a minimum investments must hedge against inflation. The Consumer Price Index (CPI) is a commonly accepted barometer of inflation. It has averaged about 3.1% annually over the past 100 years (1914-2013), at times spiking into double digit territory. Any investment that doesn’t clear the hurdle of inflation plus the cost of capital is certainly a losing one.
Vehicles of Choice
Cash itself is not an investment. It depreciates due to inflation. Besides having some in case of emergency, the purpose of having it on hand is to buy other assets which will provide a suitable return.
Our main investment vehicles, or asset classes, are securities like stocks and bonds, real estate, businesses and commodities. They represent forms of debt (lending) and equity (ownership). There are derivatives and additional variations as well, but those are largely based on these underlying assets.
Real estate is available largely as residential, agricultural and commercial property, and as raw land. Commodities encompass precious metals, oil and gas, agricultural products and the like – raw materials in which value can be stored, added or lost.
A business is an investment that also requires active management, whether from the owners or hired hands. Stocks are shares of businesses run by professional managers. Each of the aforementioned vehicles offer a wide range of investment choices.
Getting On Board
Whatever investments we choose, there needs to be an accessible and reasonably efficient marketplace, a place where we can find many buyers and sellers. Then in that marketplace we have to be able to judge two things well: Direction and value.
Large marketplaces offer plenty of pricing information. Stock quotes and comparable sales (“comps”) in real estate are common measures and important to know when buying or selling. But value is what something will be worth at a future time. It’s crucial to have a clear sense of that before buying.
When you have a sense of the long term direction and value across your investment options, then you can select the mix by which to invest that’s appropriate for your goals and situation, and the prices you are willing to pay. A chauffeur will drive you anywhere. But only you can decide if you are likely to receive good value relative to price for choosing a particular vehicle. That’s the investor’s call.