Sunday 8th April, 2007

 

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It was in classroom tutelage, under Lloyd Best, that I first heard his description of our “maroon culture” of innovation and entrepreneurship. I believe he was referring to investors who had mastered the rules to survive, but never to prosper.

His recurrent thought was that few understood that “everything depends on what resources are appropriated by whom and deployed to what end and in what sequence.”

So regardless of the macroeconomic variables of price inflation, interest rates, money supply and balance of payments, you are what you are, based on your ability to harness resources—your own as well as that of others.

The individual’s role in investment as a contributor to the economy is often the least appreciated. It falls in the realm of microeconomics whereas macroeconomics deals with things on a national scale instead of from the perspective of the household and individual.

An individual’s investment portfolio is really how that individual chooses to commit his funds to acquire assets which he will hold over a period of time. Time is always a critical element. The more time you have to achieve your desired goal, the more risk you can take in selecting your assets.

There are several other variables that affect the individual. A variable is anything that can change if you look at it at different times. For example the exchange rate, the interest rate, mortgage rates and the price of land are all variables.

These will influence your ability to acquire assets. If you wanted to acquire ownership in a bank, the easy way would be to buy stocks or shares in the bank. The best time to buy is when the price is low.

Hypothetically, if the macroeconomic report says the stock market has been falling, and returns are low, now may be a better time to buy stocks. The price of the individual stock is more likely to be lower now.

But the reverse thinking affects investors adversely: because the market is not doing well, people do not want to participate, or even begin to sell off what they have. If you’re a day trader, meaning you want to make money quick, this may not apply to you. But traditionally, the “buy and hold” for a long period strategy is the better strategy for these types of assets.

There are two broad classes of assets: marketable securities, and real assets. A real asset is a physical thing, such as a piece of land, gold, or building. It is tangible. A marketable security is a paper claim to a real asset. The paper claim means that you have a piece of paper which represents some or total ownership title. They are called marketable securities because they can be bought and sold easily, by investors. The typical securities market is called a stock exchange.

How much of which classification you select must be part of a structured financial decision. In truth, we are not the victims of variables; we are the actors!

According to Best: “It is fashionable to treat the contours of this landscape as if they were something disreputable, instead of proceeding on the premise that they are simply the outcome of historical and system forces.”

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