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The Savings Portfolio Perspective

I really liked this piece by Ben Carlson.  Particularly the conclusion:

“There will always be a handful of standout market performers that earn seemingly easy profits, but that’s really a pipe dream for 99% of investors. For the rest of us, getting rich at a painstakingly slow pace is still the best option.”

It’s funny how “investors” abuse the term “investing”.  What we’re really doing when we buy shares on a secondary exchange is not really “investing” at all.  It’s just an allocation of savings.  Investing, in a very technical sense, is spending for future production.  So, if you build a factory and spend money to do so then you’re investing.  But when companies issue shares to raise money they’re simply issuing those shares so they can invest.  And once those shares trade on the secondary exchange the company really doesn’t care who buys/sells them because their funds have been raised and they’ve likely already invested in future production.  You just allocate your savings by exchanging shares with other people when you buy and sell financial assets.

Now, this might all sound like a bunch of semantics, but it’s really important in my opinion.  After all, when you understand the precise definitions of saving and investing you realize that our portfolios actually look more like saving accounts than investment accounts.  That is, they’re not really these sexy get rich quick vehicles.  Yes, the allure of becoming the next Warren Buffett by trading stocks is powerful.  But the reality is that you’re much more likely to get rich by making real investments, ie, spending to improve your future production.  Flipping stocks isn’t going to do that for you.

This leads you to realize your portfolio is a place where you are simply trying to grow your savings at a reasonable rate without exposing it to excessive permanent loss risk or excessive purchasing power loss.  It’s not a place for gambling or getting rich quick.  In fact, it’s much the opposite.   It’s a nuanced view, but one I feel is tremendously important to financial success.

  1. Mary

    Agree on the “precise”/careful or better “specialized” use of terminology. Yes, for most of us this is a type of “savings”.

    There are lots of examples of this in social “sciences”, such as “supply and demand”, “scarcity”. Economic “scarcity” has a lot different meaning than the common meaning of scarcity.

    I think QE is also “money” printing, BUT it’s a kind of money that can’t be transmitted very well to the rest of the economy. So, again, in social “sciences” (e.g. economics), terminology spends a lot of time being misunderstood and debated.

  2. gbgasser

    Good article Cullen

    ” But when companies issue shares to raise money they’re simply issuing those shares so they can invest.”

    But isn’t it also true that many also issue the shares to pay them selves back for the initial investment that was made. Its not always true that money from an IPO is reinvested, often it is simply the profit that the initial group of owners get to keep.

    Now, the “new” shares of stock are a new financial asset that wasn’t around before so there has been creation of something but its not necessarily so the company can invest the sales proceeds. Is that about right?

  3. Cullen Roche

    Yes, that’s actually another interesting view. When companies go public it’s often because a real investor is cashing out. That is, an entrepreneur or VC firm is now selling the firm to the public because they’ve already benefited from the high growth of the firm. The public often thinks of this as some great opportunity to “invest”, but it’s often just a way to buy a high yielding savings instrument to diversify your portfolio because that instrument isn’t likely to generate huge gains going forward (because once its matured to the point of being on a major exchange it has, by definition, already experienced huge growth).

  4. Cullen Roche

    Yeah, I am fine with people calling QE “money printing” as long as they put it in the right context. That is, a deposit gets printed, but a t-bond gets unprinted. So it’s really asset swapping.

  5. Mary

    Kind of like “moneyness”, “investment” has various “descriptors”. Other items about owning stocks (stock funds, etc.): 1. you own part of the book value (“physical value”) of the company…consistent with the capital structure of the company (that has certain standing if there is liquidation, etc.), 2. also, you have a certain claim on portions of the cash flow (future) of the company… etc.

    Is that investment? Maybe.

    Thanks for your work on the blog

  6. Cullen Roche

    If you wanted to be really technical I think it’s safe to say that all “investment” occurs on the primary market. So a VC firm is more likely to consider itself an “investor” than someone who buys on the secondary exchange. That person is really just allocating their savings. Investors provide funding to firms so they can invest the funds….The rest of us mostly just swap shares of financial assets on the secondary markets and the company really doesn’t give a damn who owns it….

    Hope that helps.

  7. MrFancipants

    Wouldn’t the only exception be if you happen to own enough shares to have some influence as part of the shareholder body?

  8. Suvy

    Can’t you just think about savings being the supply side and investment being the demand side?

  9. John Daschbach

    Cullen, it important to understand that all of these things are connected and thus the distinction between primary and secondary markets is a misleading artificial construct. Investment is not money, it’s real productivity not currently consumed. We use spending as a proxy for the actual investment, but it’s the real productivity which is the actual investment.

    For instance, it is possible for a startup to obtain initial funding greatly in excess of current spending needs. Macro economically the investment is the actual spending on productivity, not the initial funding which you seem to consider “real” investing. It’s not. It enables the real investment.

    Perhaps an extreme case will illustrate this. Suppose a bunch of wiz-bang programmers agree to create the world’s greatest app by working from home for zero pay. Over a year they do this, it’s complete, and needs no further work. The macro economic investment is done. Now they sell the app through an IPO. You would call this the “primary” market. But what are they buying? A stream of future revenue. But this is what you describe as the “secondary” market. Yet we can see they are the same for this case and therefor the distinction you claim is shown to be wrong. Or take the opposite extreme case. A startup does an IPO and sits on the entire proceeds for a year. There is no real productivity and therefor no real investment. All other cases exist along the continuum between these extremes.

    Your view of the primary and secondary markets as being fundamentally distinguishable is proven to be wrong economically. It’s also wrong at the legal level. There is no difference in the claims made against real productivity for shares bought in the primary market and shares bought in the secondary market. They are indistinguishable.

  10. gbgasser

    Well, when you do think that way you just have to remember that investment creates the savings i.e the demand creates the supply!

  11. Cullen Roche

    1. I am very clear that “investors” often just provide the funding for real investment.

    2. Production and productivity are not the same thing. Your comment clearly exposes a misunderstanding between the two. THIS IS BASIC ECONOMICS. LEARN IT BEFORE LECTURING SOMEONE WHO ACTUALLY UNDERSTANDS ECONOMICS.

    3. An IPO is the primary market where funds are raised. Again, I’ve explained this point a MILLION times and it’s explained in detail in my book.

    4. I am not wrong about things just because you don’t understand economics.

    5. Do you ever get tired of pretending to understand things you really don’t come close to understanding?

    Sorry, but at some point getting lectured by you on these matters gets a little old. It’s pretty obvious that economics is a hobby of yours. Maybe you should ask more questions and spend less time lecturing people?

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