A Backyard Explanation of Investing
By Charles Carreon
What's A Backyard Explanation?
I don't know about you, but I have had some of the best conversations of my life in the backyards of America. There's something about the smell of a barbecue and the taste of beer that really brings out the conversational best in people. It's on that backyard circuit that I think we all speak best and most openly. So open up your brew and kick back, as I give you my backyard explanation of investing.
We're All Investors
If you have any type of resource, investing is unavoidable, and the first thing you invest is your time. For example, if you have a day off on Sunday, you can invest that time in a variety of ways — go to the library, go to church, go to a concert or a music store, work out or take a run, or hang out in the park feeding ducks with your sweetheart. Depending on what you do, you will get some return on the investment of your time.
Rhubarb Economics
Similarly, if you have a hundred dollars in your bank account, you can blow it all at the video poker machine, buy groceries to feed your body, buy clothes to improve your image, or buy seeds and fertilizer to plant a garden. Most people will laugh at the idea of blowing cash on automated gambling as an investment, because it is almost certain to lose you money. That's what I call a losing investment. Buying groceries will likely save you money over eating out, and nourishes your body with food you made yourself. Buying clothes may help you keep or get employment or relationships. Growing a garden might save you health expenses for many reasons, including getting out in the fresh air and eating more fresh vegetables.
Take the garden analogy further, because it really works when talking about investing money. Say I have five acres and five thousand dollars to spend on creating a garden. What should I grow? I will probably decide to grow a variety of crops — for a number of reasons. First of all, I may just like fresh lettuce, or rhubarb, or watermelon. Those have a high personal value — I won't have to buy them elsewhere. Second, I will probably be interested in growing things for sale. Third, I will think about what will grow best on my acreage — different plants grow better in different soils. Fourth, I will think about the costs of tilling, fertilizing, planting and harvesting. Finally, I will think about how to market and sell my produce.
Money's A Special Type of Crop
When it comes to investing money, there are similar considerations. You may have special knowledge about certain types of businesses, which would help you be a good investor in those types of businesses. You also need to know what the rest of the market is investing in, because ultimately you will want to sell your investments at a profit, and it's much more likely you'll profit on the sale of a popular investment that on one in which no one is interested, however marvelous its underlying financial virtues. You will also look at what your expectations are for your investments — how much do you have to invest and when do you want to get the profit from your efforts? This means thinking about something that makes most investors seasick — the fluctuating value of investments!
Yes, the value of your investments will change. Two words that help us to describe how investments change in value are volatility and liquidity. We are all into this investing thing for profit. We profit only when the values of our assets rise. If the value of our assets can rise, it can also fall. The speed with which values of investments rise and fall is called volatility. Obviously, it is beautiful when volatility causes the value of your investment to go up very quickly, and you sell and harvest a profit that multiplies the value of your investment five times! Equally obviously, it is dreadful when volatility in the other direction cause the value of your investments to plunge nauseously.
Liquidity, the second important term, describes the swiftness with which an asset can be turned into ready cash. Liquidity is a function of a market. For example, if you want to sell aluminum cans, there is a ready market for them, which is why homeless people collect them. There is also a market for publicly traded common stock, but many of the small stocks listed there are not very liquid. They are not very liquid, because there is so little regular trading in the stock, that if you tried to sell a large block of that stock, it would depress the price. Obviously, if an asset is not very liquid, you will not have your choice of buyers, and your exit price could be seriously reduced as a result.
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