This newsletter is about investing and increasing value over time.
WHAT IS VALUE?
There’s four things worth understanding about value.
Value is the assignment of worth to something. At Duane Reade, a tube of chapstick can be yours in exchange for $3 US Dollars.
Value and worth can be subjective and objective. People who wear contact lenses value saltwater higher than those who do not wear contact lenses; although we all agree on the value of scissors.
Value varies. Normalized for space, NYC rent costs more than Blacksburg, VA rent (location). An umbrella is more valuable when it is raining than when it is sunny (circumstance).
There is real-value and potential-value, but potential-value is better understood as time-value.
In an economy, humans possess potential-value and things like oil, gas, cattle, Hydrogen, gold, and cotton all possess real-value which are collectively known as commodities. A commodity is a raw material used to make things, like cattle -> hamburgers and oil -> heat. The things you use to convert raw materials into useful functions are called assets. Your home (lumber -> shelter), car (steel -> transportation), and coffee machine (coffee (raw) -> coffee (processed)) are all assets.
However, all of us potential-value-ers need to convert potential-value into real-value by completing work in exchange for real value-stores like currency. A value-store can be anything, but currency benefits from being relatively stable ($1 today can buy the same amount of goods tomorrow) and portable (I can take currency around the world to convert to other value stores). However, it can change over time and with significant value-impacting events such as inflation. Inflation occurs when currency generally loses some of its value to be converted into useful things such as food and energy.
To demonstrate, at McDonalds, I can convert $1 USD to a hamburger, but if there is an outbreak of mad cow disease overnight, then tomorrow I may have to forfeit $2 USD to convert USD into the same amount of hamburger. In short, I must exchange more of my currency value-store to receive the same amount of hamburger value-store.
In this example, anyone who has been storing value in the form of USD currency (money in a savings account), has lost value, while ranchers who were storing value in cattle become rich overnight as their cow-value-store increases in value.
As a commodity, cows have real objective value as sources of food for humans. But you don’t have to buy a cow to place some of your value in a cattle value-store. In an open market, you can buy contracts that ancitipate the future value of commodities, such as cows or oranges or precious metals like aluminum or lumber and oil. A soybean futures contract is a value-store, just like currency and just like hamburgers.
When inflation impacts many commodities at once, then all of us could be considered poorer as we can no longer convert our USD value stores nor cattle value stores into as many of the assets created from commodities, such as computers, clothes, and cars.
HOW DO I ACCUMULATE VALUE?
To increase our real value stores over time (AKA accumulate value), we can:
steal,
consistently convert potential value into real value through work, and/or
recognize or anticipate mad cow disease-like precursors and convert/exchange low-value value stores for ever-increasing high-value value stores.
The best strategies are often a combination of factors, but while anyone will teach you how to work, few will teach you how to convert low-value value stores to high-value value stores. There are a few reasons for this.
Someone has to be doing the work and those who have figured out how not to, probably prefer to continue not doing so,
It generally requires an individual already possesses a high amount of real value, of which not many people do (Who here can buy a Basquiat painting?),
The methods of exchange are generally unpredictable and to attempt this, you must risk losing value (of which fewer people are willing to do),
Akin to gambling, the methods of exchange can be complicated and those who do not understand it are generally unwilling to risk their existing value to partake and/or the methods of understanding are too cumbersome or time-consuming.
In fact, the methods of exchange can be so bewildersome that many are already partaking in several, unbeknownst to them. For example:
Homes and land generally have a positive time-value. They become more valuable over time. Your home is a value-store that appreciates in value more than, say, a currency value-store such as US Dollars in Venmo.
Banks will pay you to let them hold your currency value-stores in the form of an annual percentage yield (APY, aka interest rate). If a bank offers 1% APY on $5,000 USD in a savings account, after twelve months they’ll pay you $50.
Stocks, bonds, and other quasi-loan mechanisms will pay you to reduce the risk associated with loaning money - that you may never see it again. It’s the same concept as interest but is called a dividend and can fluctuate wildly from month to month. Furthermore, as more people decide that loaning money to Microsoft through the stock market is a good idea, the value of your existing holdings will increase and you’re paid a dividend - win/win.
Finally, we sometimes put value in value-stores known to decrease in value. Cars, clothes, and furniture are all value-stores that reliably lose value over time, also known as depreciation.
QUICK RECAP
All humans possess potential value and through work, convert it to real-value in the form of currency. Once we possess currency, which is a value-store, we spend our lives converting it to other value-stores such as hamburgers, cars, stocks, and coffee machines. The value of these value-stores will appreciate or depreciate over time and it is in our best interest to maximize value placement into value-stores that appreciate over time.
HOW DO I ALLOCATE MY VALUE-STORES IN SUCH A WAY AS TO MAXIMIZE THE ODDS OF APPRECIATION?
Not so fast!! damn!!! There’s two more concepts you need to be familiar with - liquidity and net-worth. Your net worth is how much value you possess across all of your assets such as USD in a bank account, investments, and your car’s resale value. Liquidity is how easily you can convert that value into a currency value store, such as USD.
Using the assets above, your USD are highly liquid because you can walk over to the bank and make a withdrawl at anytime, whereas your car is not very liquid. You need to find someone to buy your car, at the value you propose, and then extract that value from them in the form of tangible currency. Investments can be highly liquid or not, depending on the investment. If you own 5 shares of Microsoft, you can sell those pretty quickly on the open market but if you invested $1,000 in a CD (certificate of deposit), you usually cannot take that money out until the end of the period defined on the certificate, in which case, it is not liquid at all because you can’t convert it back to a currency value-store whenever you want. So while your net worth may be $10,000, only a portion of that may be liquid, say, $7,500.
The value stores outlined above represent different ways of allocating your value. A general recommendation is to diversify your allocations, similar to the adage dis-recommending to place all of your eggs in one basket. It is through diversification that you achieve acceptable balance between risk of losing all your value (Microsoft can go bankrupt tomorrow, your car may crash tomorrow, your bank may go under tomorrow) and likelihood of increasing value (bank accounts are insured by the government up to $250k and pay interest, car insurance will replace your car’s value in a new car, Microsoft will pay you a dividend to put value in their value-store).
Some appreciable value stores are accessible (savings accounts) while others are not accessible (Basquiat paintings). The good news is technology is making historically inaccessible value stores more accessible.
Finally, we generally refer to allocation in terms of percentages because rarely do three, four, five+ people in a group all possess the same amount of value to their name. So if I said to put 10% of your value in savings, each person’s absolute value will be different.
If everything I said above is largely new to you, I am going to wager that most of your liquid value-stores are in USD (ie: you have rent (not a value-store), or maybe a mortgage on a house, maybe a car or a bicycle, some furniture and a cell phone, a Nintendo Switch, and like, $4,000 in a bank account).
From that starting point, let’s start with the basics.
Open a high-interest Savings account. Interest rates vary over time and as of this writing, are at rock bottom. At the time of this newsletter, savings accounts are a horrible way to increase value, but they are the safest and should be an anchor in your allocation strategy, regardless. I use One Finance which offers 1% APY up to $5,000 and 3% on 10% of money wired in via direct deposit. I don’t bother with that, I have $5k in the 1% savings option and I’m never going to do anything with it until interest rates rise again, at which point I’ll look around to see if another bank has come out with a higher interest rate savings account and may move it over to there.
Open a Betterment account. Betterment is a robo-advisor. Remember when your dad used to call a human at Charles Schwab to transact some shares of Dow Chemicals or something? That’s all been automated with machines (technology increasing accessibility). Betterment is an investment account, but it doesn’t require you to know anything about investing. It will automatically diversify the money you put into the account across all kinds of equities (sorry - equities are stock in a company) and bonds (sorry - bonds are IOUs written by the government. If you give them $10 now, they’ll give you back $15 in 1 year). You can lose everything in your Betterment account if all the world’s governments and stock markets go bankrupt. Generally, the stock-market-value-store increases at a rate of 6% each year. This is 6-fold higher than the 1% annual increase in a saving account but the risk of it not rising and even losing value is higher.
Invest in yourself through education and certifications. This will increase the base-level of potential to real value conversion. If your annual salary is $50,000, but through a certification costing $500 and 100 hours of your time, your salary can grow 20% to $60,000.
The remaining options are riskier and/or require an investment in learning how to use them.
Open a retirement account. Vanguard is generally considered the best. I have an IRA (a type of retirement account) through Vanguard. When I put money into it (the government sets a limit of how much you can put into an IRA, it’s $6,000/year as of 2021), I have to select the percentage that goes towards which equities or bonds or money market purchases. This is largely a ‘set it and forget it’ approach. It is not liquid as you cannot take money out without a severe penalty and should be considered money available after retirement.
Open an e-Trade or self-directed investment account. This is different from Betterment in that you have to decide what equities or bonds to purchase. I use e-Trade for no-fee mutual funds. A mutual fund is a collection of individual equities - for example, if I buy a Vanguard Precious Metals Mutual Fund, I am putting money into a pot that distributes that money amongst hundreds of companies that deal in precious metals. If, through my research, I anticipate a semiconductor shortage as a result of various factors relating to COVID-19 and Suez Canal mishaps, then I may wish to invest heavily in raw materials that will be required to ramp up production of semiconductors - such as precious metals.
Open a self-direct trading account like Robinhood. This is a high-touch, high-time-investment, high-risk, high-up-front-currency-value-store invesment. If you wish to purchase individual company stocks, such as Microsoft, or speculative value-stores such as Bitcoin, this is a good method that will not incur fees for trading ownership in these equities.
Buy land or open an account with Fundrise. Fundrise invests in realty and new construction. It is low-yield, on the order of 2%, but also low-risk. Despite safety and higher yields than savings, it is not preferably due to liquidity. Money invested here is expected to stay here for 2 to 3 to 5 years. While you can take money out, there is a fee.
Buy art or open an account with Masterworks. While I do not recommend this, it is the same as Fundrise above but uses the pool of money to buy art, such as Basquiat paintings. When that art is sold 10, 20, or however many years later, a distribution will be paid to you along the lines of your percentage of ownership in the painting, minus fees.
Exchange your depreciating currency value-store for an appreciating currency value-store. This is called Foreign Exchange, or forex, and allows you to capitalize on changes in global power dynamics. Have you heard of emerging markets? These are places that are rapidly becoming players in the world economic stage through manufacturing or becoming a source of resources or labor. Investing in the currency of places like India or the EU or Asian countries can yield more return on your investment that USD. You can monitor exchange rates on the internet and simply buy Rupees and then hold them until the exchange rate improves and Rupees have increased in value, then return them to USD.
Amongst these options, it is generally advisable to maintain a percentage in savings (a highly liquid format should you need it immediately) that can be used for emergency purposes. This should cover your expenses to survive for as many months as it takes to be without a consistent income.
The remaining amount of your net worth should be distributed amongst other options above. Generally holding onto cash as a value-store will not appreciate in value - the hamburger you can buy today is the same hamburger you can buy tomorrow, whereas when your value is invested elsewhere, you may be able to purchase 2 hamburgers without having to do anything.
WHAT ARE SOME OF THE FACTORS THAT REDUCE THE RETURNS ON MY INVESTMENTS?
When you place value in some value-stores such as equities (stocks! equity means stock! Stock is ownership in a company. Yes, that means you own .000000000000001 of Microsoft, the company, when you buy 1 share of Microsoft through Robinhood), or even savings accounts, you have to treat the new value that comes in as income in some cases (interest on savings) and capital gains in others (sale of assets like stocks). As you know, governments require you to forfeit a percentage of your income through their income-tax program which is similar to their sales-tax program whereby you pay a percentage of an item’s cost to them (7% of a $10,000 vehicle is $700 sales tax sent straight to the government). To be fair, the tax rate on your income varies based on how much income you have. The government defines ranges of income, called brackets, and assigns a percentage to anything that falls within that bracket. Theoretically, Jeff Bezos will pay a higher percentage (33%) then a professor at a university (18%) of their annual income to the government.
When your capital - value stored in currency value-stores such as USD - invested in equities (stocks!) has gained as a result of buying Microsoft at $200 for a share and then selling that share for $250 6 months later, this income ($50) will be taxed at the same rate as your income bracket and is called capital gains tax. If you held a stock for less than 1 year, you pay short-term capital gains tax which is more than if you held a stock for more than 1 year, in which case you pay long-term capital gains tax. At the end of the year, your broker (in this case, Robinhood), which is the middle-person between you and the-thing-that-happened, similar to a real estate broker who shows you an apartment and acts on your behalf to negotiate the amount of rent with the owner of the apartment, will send you a form or several forms that will give you all the information you need to include on your tax returns.
Finally, remember inflation? Inflation is happening all the time, but at a rate that is largely unnoticable in your day to day. This is important because your investments must grow at a rate larger than the rate of inflation. This makes sense, right? If, over time, hamburgers become more expensive by 50 cents each year, but your investments are bringing in 40 cents each year, then your value is not rising at a pace fast enough to keep up with commodity and asset costs in the economy (economy is a flea market on the scale of countries and continents - the US Economy is a huge flea market where oil is sold over at tent #15 for $30 per barrel and you can get wheat at table #2 for $2 a bushel and handbags are around the corner but every day you come back and the cost of oil is now $30.10 and wheat is $2.05)
In recent history, the government has preferred to keep inflation below 2% each year. That means the returns on your various value-stores should be greater than 2%. If you take your savings account (1%) and Betterment account (6%) and perform a cost-weighted analysis (($5000 * .01) + ($2,000 * .06) + 7000 / 7000 = ) you should easily be able to buy those hamburgers for the forseeable future.
WHAT IS THE SOURCE OF VALUE? IS IT TIME? IS IT DESIRE?
I believe the source of value is necessity. We can accumulate value through many pathways (inheritance, investment, bank-robbery, lottery) but that work will always be your safety net. Investing in yourself - your skills, knowledge, personality, looks - will probably be the highest yielding value-store over time.