Wednesday, April 2, 2008

we're all gamblers

ever watch one of those old english movies, or the new ones about old england? you'll often hear a phrase like "he has 200 pounds," or "she has 500 pounds," uttered in reverent or admiring tones. this of course did not mean that the person had that amount of folding cash in their pocket, nor even that they had that sum stashed away somewhere to live on. the sum in question was the amount of interest which he or she received anually from their wealth, which would be invested in gilt-edged bonds issued by the bank of england. you could of course compute the actual amount of wealth by dividing by 2% or thereabout, the prevailing interest rate at the time, but that was not the point. the point was that the person had that 200 pounds to live on per year, in perpetuity, in an absolutely safe and secure investment. and the value of that 200 pounds was likewise secure, as the pound was a fixed amount of gold, and for centuries that 200 pounds had bought the same amount of bread, cheese, ale, clothing, servants, and so on. these stores of wealth, whether large or small, were handed down generation after generation, and they maintained their value over long periods of time.

contrast that situation to today. let's say you've got a million bucks, and you're not the gambling sort, and you're trying to figure out what to do. you've probably got about the same amount of capital as the 200 pound guy above, who actually had around 10,000 pounds invested in bonds. can you do what he does? you might say "sure, i'll buy t-bills, absolutely safe, and be one up on the old brit, since i can get 5% instead of his measly 2%." but wait, we all know that $50,000 won't be worth nearly as much in 10 years, let alone 100 or 300 years. ok, you say, i'll do like him and just spend 2%, and i'll leave the other 3% in the pot, so the million dollars will grow by 30k this year, a bit more the next, and so on. but there are complications to this. first off, leaving aside the question of whether you can live on $20,000 a year, you probably have to pay taxes on the 5ok of interest, maybe around 15%, so now you've only got $12,500 to live on. more important, how do you know that leaving 3% in the pot will be enough to stay even? right now the dollar is especially weak, and you might think you can solve the problem buy buying your bonds in euros or yen or swiss francs. but tomorrow, those currencies might be the weak ones, for none of them are truly backed by any real standard such as gold or silver. and what happens if you buy gold? first off, you've got no income; now you have to sell off part of your holdings every year in order to live, the very thing you're trying to avoid. also, since gold and silver are no longer the recognized standard for money and value, their value in terms of dollars and other currencies fluctuates up and down like everything else.

by now, i hope you've got my point, the title of this post. there isn't anything you can do to solve your problem, because we no longer live in the world described in paragraph one. (i was going to title this post "the good old days" in order to emphasize this). whatever you do, you're gambling. there is nothing which i can think of which is fixed in value, and the value of each possible investment is constantly fluctuating in relation to all others. so your task, at any particular moment in time, is to try to pick the one which is is moving the fastest in the right direction, or i should say, which is going to move fastest in the right direction. imagine about ten train tracks running in parallel next to each other, each with a really long train on it. the trains are speeding up and slowing down and sometimes even going backwards, all independently of each other, kind of like the boats or streetcars in those little races on the scoreboard at the ballgame between innings. you're on one of the trains and you can jump over onto any one you want at any time. your mission, should you choose to accept, is always to try to be on the train that is moving forward the fastest. if you are mostly successful, you will be working yourself toward the front of the trains, and one day might actually arrive there, if indeed the trains have a front. the purpose of this blog is to present sensible, perhaps provocative ideas as to how this might be accomplished. as always, should you or any member of your team be killed or captured, the secretary will disavow all knowledge of your activities.

5 comments:

Selene Kumin Vega, Ph.D. said...

I just love that your writing is so easy to follow on a subject that I have such trepidation about! You've made it interesting. I look forward to more! Thanks.

Kelly said...

I am so excited to see that someone as brilliant as jim is blogging on this important but often misunderstood or metally blocked topic.
I look forward to more posts!

valleyriver said...

Great beginning! There's so much financial upheaval in the air, I'm looking forward to learning more about your perspective. Your words have the ring of financial sanity, just what we need these days. Thanks for taking the time to share your observations and insights.

Steven R. Newcomb said...

OK, you got my attention. At a moment when the forward/backward/relative motion of the trains is less predictable than at any time in my almost 60 years of life, I need all the help I can get. I see lots of things I want to take my money *out* of, but not too many that I want to be *in*. I want to get out of U.S. dollars, for example, but I should have thought of that earlier than now, and Euros are looking pretty expensive.

Suntrinsic said...

Hi Jim! What's your take on these often-heard opinions? (1) Since its inception, the U.S. stock market has had some spectacular ups and downs, but its overall trajectory has always been up. Therefore, a prudent, well-chosen and -diversified mix of equities, bonds, and cash--and a willingness to stay invested over the long haul--is the best hedge against inflation and against such alleged facts as that even returns of U.S. Treasury bonds rise and fall over time. (2) Huge stock-market crashes and long economic depressions are less likely to happen in the "developed" world than in, say, the late 1920s and 30s, because of how alertly the economy is now managed. (3) Money is a social construct, a mutual agreement on a standard medium of exchange. In some cultures and at some times, value has been tied to gold, in others to cowrie shells. The fact that it is now plastic, or stipulated by the World Bank or whatever, does not perhaps mean it is any less real or stable than it has always been.

I'm really interested in hearing all points of view on these matters. Thanks for blogging! I want to read Prechter, for instance.