July 2018 - Personal Finance Blogs

This month, July 2018, I’ve decided to embrace my recent non-traditional and alternative thoughts on the personal finance space and talk about a number of things that I’ve been battling with internally about money, the markets and investing. This is the fifth post in this series. Please go back and read the first post on Energy and The Earth is a Closed System, and the second post on What is Money. I’m not an expert – just a regular person trying to find the truth.

In the United States, one of the first thoughts you might have when thinking about investing is the stock market. “I want to invest my money. I can invest in stocks!”

This month, July 2018, I’m looking to explore the finance world, and look to touch on a number of things which have seemingly been lost or ignored in the personal finance space. Stocks and investing in the stock market are thrown around without care and deep thought.

In this post, I will be looking at what it actually means to invest in stocks, what makes a stock valuable, and give some other thoughts on investing in stocks.

What is a Stock?

Let’s start off with the basics, as I love to do in my articles here on the blog.

What is a stock?

Simply put, a stock is a paper representation of a piece of a company. It represents an ownership stake in a certain company. When a company (private or public) forms, shares of stock are distributed to the owners and shareholders depending on the money and work put into the company.

In my small business, I own a certain percentage of stock in my company. At my day job, we were given some shares of stock a few years ago, so I now own some company stock.

What Makes a Stock Valuable?

What makes a stock valuable?

For a given company, the value of the stock is dependent on the future profitability and productivity of the company. This value could be high if the company is growing and is profitable, and this value could be low is the company is struggling.

The value of a share of a certain stock in a company is NOT the price of a share listed on an exchange. This is something that seems to be lost in many people’s heads (maybe it was never there).

Stocks are valuable because of the future expectations of the various companies associated with those stocks.

In the United States, the economy is the strongest in the world and many of the best companies are headquartered here. Most of these companies are profitable and productive, and as a result, having an ownership stake in some of these companies makes sense because there is value there.

That being said, does the value line up with the price? There are a number of investing books which could help you understand how to value a company by looking at fundamentals and considering the macroeconomic environment.

If you know how to value a company, then you could ask questions about the present day market: does it make sense to pay $1800 for a share of Amazon? Is Netflix worth it when the price to earnings ratio (essentially, price of a share divided by profits) is 200+? Why are bank stocks falling?

Remember: value is what you get, price is what you pay.

Will the Stock Market Go Up or Down in the Future?

In the past couple of weeks, I’ve made a number of comments on my podcast, Twitter, and even a little bit on the blog here implying I know things about the future stock market direction.

If anyone thinks they have a crystal ball, turn around and head in the other direction. The only thing I know is that I know nothing at all. Gurus, “experts” and people who think they can predict the future are delusional (in my opinion).

Daily market moves are more or less noise. In the past, in the United States markets, the stock market has trended up over time. In other markets, the stock market has gone up some, gone down some, and sometimes stay flat for many years.

I have no idea where the stock market will be in the future.

At the end of the day, what I want to do with this blog is give you the tools to think for yourself. I believe critical thinking is important in any actions and steps you perform.

Will the stock market go up or down in the future? Yes.

Concluding Thoughts on Investing in stocks

Ownership in companies through stocks has been a way to store and grow wealth over time.

This article was a little shorter than the other ones in this series, but was necessary to write to clear up a few things.

The main point of this article is that I wanted to make it clear that stocks are not valuable by themselves. Every once in a while it’s good to get a reminder of what actually is behind some of the more complex things in the world.

What it means to actually invest in stocks is that you are investing in companies which you believe with be productive and profitable going forward.

Again, stocks are only valuable because they represent the future cash flows and productivity of a company. Buying an individual stock makes sense if you believe a company will continue to produce goods and services for their consumers in way that allows for continued success. Selling a stock makes sense if you believe a company may not be able to be as profitable or productive in the future.

Price is what you pay, and value is what you get.

Finally, just remember: stocks will always go up and down. That’s the only guarantee in stocks 🙂

Hope this article was enjoyable and gave you some good information on stocks.

In the next post, I will be touching on some more fundamental knowledge we need to cover. Then to round out the series, I’m going to write about some controversial thoughts and opinions I’ve been battling with internally.

Thank you for reading,

Erik

This month, July 2018, I’ve decided to embrace my recent non-traditional and alternative thoughts on the personal finance space and talk about a number of things that I’ve been battling with internally about money, the markets and investing. This is the second post in this series. Please go back and read the first post on Energy and The Earth is a Closed System before reading this one.

What is money?

This is a simple question, with a seemingly simple answer.

But, really, what is money?

Also, what is debt? Are they the same thing?

Thinking about our first post of this series, how does energy play into these definitions?

At the end of the day, I want to let you know I’m pursuing TRUTH. I’m not an expert, but will not stop short of understanding the true nature of our world and financial system. In this series, I’m just looking to dive into a number of topics regarding the markets, the economy, and see what they actually represent and man.

In this post, we will explore the simple question of what is money and hopefully look to uncover some truths along the way. All I ask is you have an open mind while reading this post.

What is Money?

What is money?

I typed “what is money?” into Google and got a ton of hits – all from financial and information websites (Investopedia, the IMF, Wikipedia, and Economics and Liberty)

Most of what I looked at had similar definitions of “what money is”.

Money, simply put, is a medium of exchange.

Societies throughout history have used money to make it easier to exchange and trade goods.

Very early on in history, humans used bartering as the main way to exchange and trade goods. “I’ll give you 2 pounds of grain for 1 gallon of milk” was probably close to a common trade back in the day.

Unfortunately, milk and grain go bad after a certain point, and humans looked to other things they could use to facilitate these activities.

Silver, gold and other precious metals were used, and over time, paper and digital forms of money have been introduced to facilitate the exchange of goods, services, and capital.

The type of money (silver, goods, cash, etc.) is determined socially, be it by a governing body or by the people in a given market.

At this point, I could go into the functions of money, what are some of the properties of “good” money, and talk about “why fiat currency is the best form of money and why cryptocurrencies have no intrinsic value” (or is it the other way around?), but these are just distractions from the question we are trying to answer of “what is money?”

What I don’t like about the simple definition above is that is ignores the fundamental constraint of the world: energy.

Money is a Number for True Capital and a Claim on Energy

Let’s go back to the first post of this series and consider the conclusion from it: energy and the environment drives the economy and the world we live in.

With this in mind, our definition of money from above needs tweaking.

Here’s what I believe the true definition of money is: money is a claim on a certain amount of energy.

Think about it, with $25, you could pay someone to cut your lawn for you (which requires energy), or you could spend an hour of your valuable time and keep your $25 (but in this case, you personally have expended energy).

The more money you have, the more things you can do because you can afford to use a certain amount of energy.

Speaking a little more in general, the cost of buying something (monetarily), should be roughly equal to the amount of energy (be that actual energy, joules) put into producing that something.

Over time, as processes become more efficient, the cost of goods should decrease, because efficiency leads to lower uses of energy during production.

If money is energy, what are the results?

After establishing a definition, it’s good to look at some of the results and logical statements we can conclude from it.

First, if money is claim on a certain amount of energy, then we can say the following:

Money in a closed system should be finite, as energy in a closed system is finite. (First law of thermodynamics)
Having more money is good, as it allows you more options. (obvious)
If money is a claim on a certain amount of energy, then debt is a future claim on a certain amount of energy.

Money, Debt and Energy

For the last point, I haven’t mentioned debt in this post or series yet, and plan to do a deeper dive later in the series. Right now though, since we are talking about money and energy, there are a few things that make sense to say here.

As stated above, debt is a future claim on a certain amount of energy (or resources). Debt is kicking the can down the road, so to speak, and if done appropriately and in a reasonable way, can be sustainable.

As time goes on, productivity and the costs of doing business should increase, and the entity should be able to pay back their debts responsibly.

That being said, if debt is added in an irresponsible manner, then because energy is finite, at some point, there will not be enough resources to continue at a large scale. Scarce energy will result in higher prices and the cost of doing business will increase. Businesses and governments fail in this situation and then look to build back up in a sustainable manner.

This is the economic cycle, and a digression from this post’s topic… but necessary to put here.

Searching for the Truth and Thinking Critically is All We Can Do

This is the second post of this month’s search for the truth in finance, economics, and understanding the world.

What is money? Money is a claim on a certain amount of energy.

This month, all I’m looking to do is provide food for thought. I’m not an expert, but one of my goals in life is to have an open mind, understand that as a human being, I’m biased but can overcome that bias, and at the end of the day, I can improve my worldview with new facts.

In the next post, I will be looking at banking: the traditional function of banks, how banks actually work, and how banks actually make money.

While I won’t be mentioning this explicitly in my upcoming posts, I want to keep in mind the fundamental concepts of money, debt and energy with regards to the economy and economic growth.

Thanks for reading,