Weekend Reading – Housing corrections, tax loss, fears and simplicity

>>Well, to be literate as well :), I’m not sure there is a singular definition for anything in life.

I’m sure mathematicians, physicists, chemists, biologists, engineers, and other scientists would disagree whole heartedly.

>>Everything has a context. “Investing” could mean the act of being invested on oneself (as in education, health, other) or in a financial respect, it could mean how you commit capital to something, with again, an expectation of obtaining an additional income or profit.
http://www.investopedia.com/terms/i/investing.asp
Again, just one source for this definition.

Guess it all depends on your scope of view, but within the context that Carrick uses, cash and stocks, financial entities (banks, advisors, brokers, etc), have taken the macroeconomic true operational definitions of savings and investment and flipped them when applied to individual personal finance. No idea why, but it probably had to do with being easier to squeeze money out of an individual than a whole market. Besides that, individuals are basing their financial interactions with the greater economy on functions which operate completely opposite than how they have been defined for them: what they think of as investments, the economy knows to be savings. The economy is the aggregate of all perspectives, so why has the perspective at the individual level become so warped? I would also guess “expectation” is a wholly individual factor, as it is never mentioned within the context of an economy.

Here’s a couple more descriptors:
#1. “Stocks and bonds are considered to be important intermediary forms of savings as it gets transformed into a capital investment that produces value. Mutual funds, CDs, BICs, GICs, pension obligations, insurance annuities, and other forms of savings marketed by financial intermediaries, all consist of stocks, bonds, and cash balances, which in turn pay for the capital that increases productivity, efficiency and output of goods and services [i.e. investment].”
https://en.m.wikibooks.org/wiki/Macroeconomics/Savings_and_Investment

Again, “investment that produces value”. Cash, stocks, bonds, Gretzky rookie cards…none produce value. They may store (save) value, but they do not produce it; thus, as we will see later, Carrick is incorrect in his classification of different assets.

#2. “Saving is income that is not consumed, so far so good. Savings, however, does not automatically become investment. I would define investment as the production of capital goods, goods used for producing other goods.
(By the way, note that buying stock isn’t investment–that alone is simply a transfer of ownership titles. Investment requires new capital goods).”
https://www.quora.com/Macroeconomics/To-a-macroeconomist-what-is-the-difference-between-saving-and-investment

Again, “investment as the production of…goods used for producing other goods.” As above, savings vehicles are not production vehicles. A stock is not a factory. That last note is of utmost importance: “buying stock isn’t investment–that alone is simply a transfer of ownership titles. Investment requires new capital goods.” The function of stocks is something else the financial sector has completely distorted in the context of individual personal finance. The stockholder saves, the company invests. A stock is merely a claim on future production of said company, you don’t actually own a piece of the company as has been so thoroughly popularized. Perhaps Carrick should address this if he wants people to fully understand savings and investment. (As a side note, the stock’s ownership title isn’t in your name; you might buy it, but you don’t own it.)

>>Curious, do you believe in one definition for one word with one meaning?

Sure, for some words like ‘banana’…there’s not much else that can be banana, is there? Something can be “bananas”, slangily, but that’s different than banana, right? Even Carrick gets this subtlety wrong.

Firstly, “Saving means putting safety first while gathering money for short- to medium-term goals.”
No. Saving simply means not consuming now (e.g. “Are you going to eat that doughnut?” “No, I’m saving it for later.”).

Secondly, “Savings accounts and similarly safe vehicles pay 1 per cent to 1.8 per cent…”. Carrick is not only defining the act of saving with the form of savings, but also giving them both the same definition: safety. It’s like saying all people who run get exercise, except there’s a big difference between running after your child at a playground and running professional endurance marathons.

Thirdly, Carrick confuses the issue further with this statement: “Sixty per cent of all savings and investments are in cash…”, so now cash is both savings and investment? That must mean stocks can be both, as well. And if not, why not? Starting to be clear why financial literacy is in decline…

>>I don’t discount that your fondness for private equity is not investing, I think it is, but investing has a context and the way you invest may not be how others invest – it doesn’t mean both investors don’t have similar outcomes (i.e., to earn or gain a profit from it). Thoughts?

The context is a created distortion where savings is now equal to only cash and safety, and investing is now a blanket statement to mean ‘everything not cash’ and risk. (And speculating is saved for fools and last resorts.)

It’s like the active/passive debate, if people understand the root of what they are doing, it can change their perspective and future actions. If Carrick wants people to become financially literate and stop being frightened of the stock market in order to have a comfortable retirement, then perhaps a good start would be getting people to understand that stocks are just another form of savings.