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In an
interesting e-mail conversation the other day, I
realized that we sometimes forget the basics of
investing. We are too often focused on the “trees” and
forget about the “forest.”
My
e-mail discussion was with Wellington Yap. You ought to
drop by his website, http://trading101.webs.com, for a
well-thought-out perspective on the markets. I like it
when someone says, “I can’t predict where it [the
market] will be in weeks or months. No one can. We can
only give probabilities where it will be headed.”
As
investors we tend to overlook the bigger picture in our
quest to understand the smaller part of a picture. We
sometimes ignore history because we are too busy
concentrating on today’s crisis or today’s boom. Yet, as
a rainy or a sunny day is only part of the weather that
is a changing part of the climate, everything does fit
together.
There
are only five basic storehouses of wealth which become
the five basic vehicles of investment. At the same time,
they are the five basic components of a business.
Ultimately, any investment that you make is in one or
more of these financial parts of a business, either your
business or someone else’s.
The five
pillars of wealth and investment are real estate,
equity, debt, commodities and gold.
Every
business occupies some sort of physical space, no matter
how small. A business must buy or rent a store, factory
or warehouse. Now, for many people, a computer becomes
the office, plant or the retail location. A business
must invest in “real estate.”
Equity
is the ownership of a business that shares in the profit
or losses of that business. Debt, on the other hand, is
money loaned to a business that must be repaid with
interest regardless of profitability or losses, and the
lender does not share in either the good times or the
bad. All businesses must have equity participation and
must also carry debt.
“Commodities” are the raw materials that any business
must consume to conduct their business, be it flour for
a baker or leather for a shoemaker. And “commodities”
also include anything else to which a business “adds
value” and sells for profit. Movie companies take a
person with talent and trains and nurtures that talent
to create a “value-added” superstar who is marketed and
sold for profit.
Gold,
throughout history, and like its physical property, is
the unchanging, immutable, storehouse of wealth. Its
value is always only relative to the value of other
commodities. Five hundred years ago, you could exchange
an ounce of gold for a fine suit of clothes, as could
your great-grandfather at the turn of the 20th century,
and as you can today.
Notice
that money or currency is not included on this list. The
reason is that money is only the facilitator, the
vehicle that allows you to change from one of these five
to another. Currency was only a convenient substitute
for physical gold as the ultimate storehouse of wealth.
Since the collapse in 1971 of the 1944 Bretton Woods
agreement, currency is only a medium of exchange and
sometimes used and traded as a commodity.
These
five pillars also apply to an individual as if you were
a business. You trade the commodity of your expertise,
time and knowledge for money that you then trade for the
commodity of food. Your residence is, at the least,
nothing more than the “office” for your business of
trading the commodity of your effort to someone else.
You buy ownership in someone else’s business by buying
shares of stock at the Philippine Stock Exchange (PSE)
again to make money for your business. You loan money to
the bank through a savings account or time deposit to
increase the wealth of your business.
As
investors—and we are all investors whether we think so
or not—we are looking for opportunities to transfer our
wealth into one of these five that is going to increase
in value higher and faster, relative to the other four.
In a simplistic sense, we transfer our wealth into
business ownership through shares of stock hoping that
the value in relation to real estate will grow faster.
Assume
you have a million pesos, and a condominium unit you’ve
been eyeing costs P2 million. If your investment of P1
million in PLDT shares appreciates at the same rate as
the price of a condo at The Fort, you have gained
nothing. But if the price of PLDT doubles while the
price of the condo stays the same, then you can
conceivably sell the stock and buy the condo, which you
could not afford before.
So the
secret of investing is to look at the forest and figure
out which of the five is going to increase more rapidly
in value in relation to the others. As oil doubled in
“price,” did your salary also double? Wasn’t it that
rice or oil became more expense? These commodities
increased in value faster than your relative value as
senior vice president of the company, for example.
I
believe, right now, that one particular “tree”—business
ownership through buying shares of stock at the PSE—is
going to increase in relative value faster than condos,
oil or gold, or any other tree in the forest.
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