INVESTMENT STRATEGY II

Last time we learned that there are three levels of economic well being. The third level is the investment level. Investing means to be clothed in something permanent or not fleeting. This means that investing is not speculative. Investments are meant to be long term sustainable. This means avoiding all investments in fly by night enterprises. This means avoiding all investments based on fads. What is popular today, may not be tomorrow.

Therefore investing will necessarily involve the spiritual quality of prudence. Prudence is cautious wisdom. Prudence would undertake due diligence or thorough research before proceeding with an investment. It is better to understand what you are getting yourself into before proceeding. Many people rush to make a decision and they are encouraged to make rash decisions by those whose livelihood depends upon making a commission.

Making money by investing is an art. Each of us has different temperaments and therefore differing level of risks. It is best to know what kind of person you are when it comes to money and investing. We should be wanting to increase our net worth. This means investing in things of value. Value is subjectively determined. What is valuable to one person is not valuable to another. For instance, in the desert water is more valuable than gold. Value is therefore relatively determined, but this relativity has behind it absolutes that determine our actions.

Investing involves the market. Without a market in which to buy and sell there is no investment possible. Therefore investable funds should be put into a market. Even though value is subjectively determined, the market makes this value objective. This is another way of saying cause and effect. The spiritual precedes the physical even in the financial world. The market makes the invisible, visible.

Investing then is the invisible made visible at the individual level and culminates in the market where individuals make a whole. Investing then is based upon the principle of the one and the many or unity and plurality. In reality, all exchanges are based upon this theological truth and all exchanges require more than one party. Thus, finding a market that will be around for awhile would be prudent for an investor.

Once you have invested your funds, you want to be able to at least get your principal back. Of course, you want your investment to increase in value, that is why you invested your surplus funds in the first place. What is the best investment vehicle? This depends upon the individual. If value is determined at the individual level, then only that individual can answer that question for himself. There are principles of investing, but ultimately each individual is responsible for how he invests his surplus funds. Frugality and prudence are essential for the investor.

INVESTMENT STRATEGY

According to the Alpha Strategy by John Pugsley, there are three levels that make up a whole of economic well being. Most people do not think in terms of levels when it comes to economics. The first level of any budget is to take care of necessities. This is the foundational level. This level is where you earn an income. This means doing all you can to increase your skills. Being a student of your particular industry will go far in helping you to advance and increase your earning capacity.

The foundational level is something that you can never get beyond because you will always need to earn an income to meet your daily needs. This should be an ongoing process. Learning is not static, but progressive. The more you learn and apply, the more income potential you have at your disposal. Increasing your earning potential helps you to get to the other two levels of economic well being.

The next step in the process is to keep records of what you earn and what you spend your money on. You must keep track of inflows and outflows. The key here is to make sure that you have more income than expenses. This will give you a surplus. A surplus is the same as profit for a business. It is a residual and a reward for being frugal. With your surplus, you are able to live above subsistence level and able to avoid being in debt. This process takes what most people lack, self discipline. You must control your spending. You must never spend more than you earn. This is the key to any investment strategy and the failure of most people in becoming wealthy.

When you have a surplus, you are not living from paycheck to paycheck. When people live

paycheck to paycheck, they lack planning and are living in the immediate moment. They lack understanding of how finance works. With your surplus, you will need to stock up on things for future use. Your house should be well stocked up, so that you are not endlessly running to the store to get things that you need. Buying in the largest quantity is usually wise because there is usually a saving to be gained over buying a smaller quantity. Most stores have a price per unit and you can compare prices of the larger and smaller quantities of a given product.

Having a surplus allows you to buy many items of a product that are on sale. This allows you to enjoy the savings of a product over an extended period of time. The more that you can buy of that product, the more the savings. When you do this over a vast array of your purchases, you can multiply your savings and have more of your surplus left to begin on the next level of budgeting.

The highest level of this strategy once you have secured your income stream and stocked up, is to use your extra funds to invest. Noah Webster’s 1828 Dictionary, for our purposes, defines invest as, "to clothe money in something permanent or less fleeting." Investing is looking for something that will not disappear over night. Investing is not gambling nor speculative. Investing is well thought out and requires planning on the part of the investor. The question is what should I invest my surplus in? I will leave that for next time.

BUILDING WEALTH TAKES TIME

The frugal know how the world works and then lives within the limitations that have been predetermined. The frugal recognize that they live in a world of absolutes and they make these absolutes their partners in the furthering of their goals. They know that slow and steady is the way to build anything. Trying to rush means making mistakes that may prove to be fatal to one’s goals of achieving wealth.

It should be everyone’s goal to seek to improve their standard of living. Our net worth should be increasing, not decreasing. When you put your money in speculative ventures, if you lose all of your money, you have no one to blame but yourself. A fool and his money is soon parted by being reckless with his money. The wealthy are not gamblers. Gamblers are reckless. Gamblers act as if there are no consequences following their actions. Gamblers do not believe in cause and effect because they are solely effect oriented.

If work is productive, which it is, then the way of wealth is based upon earning an income from gainful employment. Work has the idea of effort behind it. Work requires everything that we have to make it work. All work has a physical component attached to it, as well as mental. Work requires the coordination between the spiritual and the physical. Work is primarily a spiritual enterprise. We do not work just to work, but there is a goal and a purpose to our work. We are bringing an objective product to the market to fulfill a need. This means that the spiritual must direct all work.

Usually, we are not able to meet all of our future needs by working just one week. It takes working week after week and year after year to be able to accumulate additional funds above our needs. To begin accumulating wealth has as its cornerstone that you must spend less than you earn. When you do this, you have a surplus. Businesses call this residual, profit. This means that costs must be kept to a minimum. The only way that costs can be reined in is by self discipline. Knowing what is a necessity and a luxury allows one to take care of essentials first and foremost. It is a matter of priorities.

As the surplus increases through systematic additions by saving a proportion of one’s income, there comes a point where this surplus must be put to a productive use beyond receiving interest income. This surplus must be made to grow. This means finding investment worthy vehicles. The best would be investing in objective items that will be used in the production process of making tangible goods. These are things that never go out of style and are thus necessities. There will always be a market for these goods. These type of goods do not become obsolete. All of this requires time and effort. Fortunately, we were made for both. This is the way to gain wealth. This appeals to the frugal, not the spendthrifts.

THE MARKET WINS

It is amazing to watch man’s attempts to beat the market system. Businesses, individuals, and governments are all in this together to see if they can somehow go around predefined limits. We hear that this is a new era or we now have new power players that will somehow lead us to the promised land of getting something for nothing. Gary North calls these types slow learners. In reality, they are no learners. These types are never able to come to a knowledge of the truth.

Most people are anti-work. They do not like work because they are lazy. They would rather be involved in some mindless endeavor that demands nothing of them. This is because mentally, they have checked out of life. They long for a life where everything is provided for them and they are free to go wherever and do whatever they want. These types are daydreamers. They desire to fashion a world where work is forever banished.

This is not the world that we live in. Paul said it best in 2 Thessalonians 3:10, "For even when we were with you, this we commanded you, that if any would not work, neither should he eat." Being gainfully employed is holiness. The standard of work is found in the Fourth Commandment of the Decalogue. Exodus 20:9 reads, "Six days shalt thou labour, and do all thy work." This gives a weekly pattern of six days of work and one day off. Since Christ has come, the weekly pattern starts with one day of rest followed by six days of work.

With the recent financial crisis, some people have not been able to afford day care. So they are seeking to find alternative ways to keep working and have their children taken care of. One alternative is to put their children in unlicensed day care. This day care is usually more affordable than day care centers. Of course, there are howls from the licensed day cares because their livelihood is being threatened.

Some of the howls that are being bandied around are that unlicensed care is a dangerous situation. Let us examine this howl. Children have been given by God as a gift and parents have been providing day care for children for six thousand years. This is a natural and normal situation. So why can’t a mother who stays at home be able to provide day care for other children? She is qualified by having her own children and providing day care for them.

The real issue is not the safety of the children. The real issue is that the day care centers do not want the competition. Regulation of day care has limited work opportunities for others thus causing day care centers fees to be overpriced. This industry wants regulation so that they can charge the consumer higher prices. They always say that they are interested in the children, but they are more interested in protecting themselves from other workers. In other words, they are liars.

Parents realize that they have limited options. So the market wins out over man’s regulations. People are going to find a way around government regulations. Call it the black market, but in reality it should be called the white market. The regulatory market is the true black market because this market seeks to limit opportunities for work. This makes the regulatory market anti-work. Regulatory markets are about creating scarcity, therefore driving up the price of their commodities.

People have fixed incomes and they must make decisions that are in their best interests. This means that they will seek to find products at the least price available. The established economic law is that more will be demanded at less price. Day care is no different. The market is winning over regulation. Every time that the market begins to want to deregulate, those whose economic interest are at risk begin to cry to the government to stop this wildcatting. The regulators are our neighbors who use the government to keep us from working.

I applaud those providing unlicensed day care. They are the ones seeking to help their neighbor by providing affordable day care. The established day cares resent the market. The market system is always heading for decentralization. The regulators want control and thus seek to centralize everything. With a decentralized market system comes abundance and plenty of work for all with lower prices. A centralized market system produces scarcity, unemployment, and higher prices. No matter what, the market will win out in the long run as is the case in what is occurring in day care.

UNDERSTANDING ECONOMICS

Not many people have an inclination towards what is called the dismal science and yet economics is something that effects peoples lives on a daily basis. When I looked up the definition for economic or economical in Noah Webster’s 1828 Dictionary, I found out why I am an economist. Economic means "managing domestic or public pecuniary concerns with frugality; frugal; regulated by frugality; not wasteful or extravagant."

An economist is one who Webster defines as, "one who manages domestic or other concerns with frugality; one who expends money, time or labor judiciously, and without waste." Webster renders economize as, "to manage pecuniary concerns with frugality; to make a prudent use of money, or of the means of saving or acquiring property." Frugality and prudence are linked together when dealing with economics.

The theme of the Frugal Accountant is that frugality is always a virtue, so an economist is by definition virtuous. However, in our day and age, most economists are far from being frugal. Most economic policies are profligate. They are not wise and most economic policies are short term without considering the long term consequences. Henry Hazlitt wrote about when instituting any economic policy what must be consider is not only the short term consequences but also the results of the policy in the long term and its logical conclusion. This, of course, requires understanding economics.

For instance what happens when the government institutes rent control. In the short term, renters are going to pay below market prices for rent. This is good for the renters and there will be more renters than the supply of rental property, in this situation, because more will be demanded at less price. However, in an exchange, there are two sides to the transaction. What is not considered in rent control is the landlord of the rental property.

The landlord is forced to charge a set amount of rent by government decree. Since there will be more demand than supply of rental units, the landlord has no incentive to build more rental properties. When the rent is fixed below the market, the landlord will potentially be operating at a loss. There is no incentive on his part to maintain the property because he will be losing more money. Thus, we have the creation of slums and the derisive title given to the landlord of a slumlord. The cause was not the landlord, but the government’s economic policy of rent control.

Yes, people need a place to live, but it is not the government’s place to provide people with

housing. This is a family responsibility. This is where being an economist comes into play and a use of the spiritual quality of frugality. Welfare is an inescapable concept. Welfare is to be accomplished by the family, not the government. This is one of the reasons that the welfare state is an example of the opposite of economics. An economist who is worth his keep will vehemently oppose all rent controls, or he is a charlatan.