Today, one of my twitter followers who I’ve had an increasingly friendly rapport with walked me through a preliminary briefing on the investment landscape around the commodity, uranium. It was very enlightening, and I’m going to do a bit more reading into it once I get home today, and then get back with her to continue the education.
One thing our conversations really underlined for me, though, is how superior stocks (or equity investments) are to all other form of investment assets. I don’t mean that necessarily from a financial point of view (although equity returns are often the highest of any other asset class) but more from a philosophical stand point.
When you invest in other assets, most of the time, you’re investing in objects. They’re things that sit there, and swing up and down in value, whether we’re talking commodities, currencies, or even bonds and real estate. The latter two are slightly better since they have some intrinsic value due to their income producing nature, but by and large, they can’t act or think or change their fundamental nature. They’re dependent on the forces of demand and supply, and your returns as an investor depends on your accuracy in forecasting the impact of demand and supply on them. Which is fun, but in a sense, static. Nigeria’s story with oil is a prime example, one day we’re the cock of the walk, then shale comes around, Saudi Arabia ramps up the production, demand slumps and suddenly, we’re the feather duster.
Equity on the other hand is a legal right over the products of human enterprise. It’s literally a bet on human ingenuity. Apple became the move valuable company in the world, enriching its investors beyond measure, largely because of Steve Jobs. If it had just sat there, the company would have died. Instead it went from nearly bankrupt tech hasbeen, to the global behemoth it is. No commodity can do that. SpaceX, Tesla, Disney, Coca-Cola, JP Morgan, Canada Pacific Railroad, Facebook, most of these don’t have anything else propelling their value beyond human intelligence, drive and ingenuity. If you invest in a company, and the market for what it drives dies, management can switch businesses. Berkshire Hathaway was a textile manufacture, then an investment partnership, and now a conglomerate/private equity fund.
If you want, you can set up a corporation that buys a house. If the house produces enough income, you can buy another, and another, and another. That’s how businesses work. You can issue bonds, and pay them off, invest in other things, and reap their profits. All the other assets can’t do that. A bond will always be a bond. A dollar will always be a dollar. A gold bar is always a gold bar.
These things may increase in value or decline in value, but they remain what they are. Equity, at the end of the day, is as free as the human beings who own it. That is why it always ranks near the top whenever asset classes are compared.