“Wealth is nothing more or less than a tool to do things with – only a means to an end.” Henry Ford
Do you know what your money is working about?
We all put our money in hands of firms that invest it. It can be our insurance companies, the savings accounts in our banks, or our investments, such as our pension funds. We use to think about each of these accounts, if we think about it at all, as a safe where our money lounges contentedly and multiplies.
Unfortunately, this is not the case.
These financial firms use most of our money to make investments according to their questionable preferences. Their choices, however, often work against us.
Money moves the world, the saying goes, and it undeniably does to some, big, extent. We better know how our money works, then, so we can move the world in the direction we want it to go.
We better know what investments are, which are the beneficial ones, and which are the bad ones. That way we can let our money work both for us and for the world. As the economist Thomas Piketty says,
“The principal mechanism for convergence at the international as well as the domestic level is the diffusion of knowledge.”
So we better know how to invest, directly and indirectly through the companies that handle our money, in a way that will benefit us all.
I am not professional investment counselor, however. My financial writing is based only on my personal research and experience.
Here, in a nutshell, are the basics about investments in the stock market.
The Basic Gains
The most common ways of investing are buying bonds and shares. Bonds are essentially loans we give the government or a private corporation, which promises us a full return plus a known interest on a fixed date.
A share is just that – a small share of a company. Buying a stock makes us partners in the company, so if the company worth more, our share is worth more. With some types of stocks, we can also get some of the company’s profits as dividends, or take part in its management as shareholders.
Giving money to a company in exchange for its bonds or shares helps the company grow, so it is a valuable action to take, assuming the company is beneficial to the world. This assumption, unfortunately, is often incorrect, so we better check it rather than assuming such hopeful assumptions.
Yet, as most of us don’t have the time, knowledge and desire to check the value and values of companies, we have two other options to ensure we are putting our money in the right hands.
One is to look for someone who does have the ability to estimate companies and predict their performance. Sadly, trusting experts who buy shares of few companies is still risky, if for no other reason, because over time not many people managed to outperform the market, and not by much. (Our pension funds, for instance, regularly gain less than the market’s average profits. Therefore it is often better to choose self-managed pension plans.)
The other investment option is the simple and rational one: don’t put all the eggs in one basket. The primary advice of the experts is to invest most of our investing money in very wide index funds. Each of these funds includes tiny pieces of myriads of companies, and together they can represent the global economy.
The Rewarding Basic Numbers
The global economy is lucrative. Over the last century, more and more money has changed hands worldwide, so the economy has continually expanded. The stock market growth has been about 8% a year on average (10% growth minus about 2% average inflation). Therefore, the value of our shares goes up, and in the long run, we always earn money.
Consequently, over 10 years, every $1,000 invested in wide index funds, together with the compound interest, becomes on average more than $2,100. (If we don’t pull out any money beforehand. Especially not when the market is low or falling.) There are many calculators we can use to calculate our gains, like this one.
When we do pull out the profits every year, we get for a million dollars invested, after deduction of management fees and taxes, about $60,000 per year. It is $5,000 per month, which in most of the world is enough for a comfortable living.
In the short run, the stock market can get less than the average. So investing for the long run, more than a few years, is the only way to ensure our profits. As Warren Buffett describes the necessity of long-run investing,
“You can’t produce a baby in one month by getting nine women pregnant.”
Therefore, investing in wide index funds for the long run can ensure our basic profits.
Even if we are not selective.
The Right Choices
Many of the companies included in these wide index funds are extremely harmful to our world. If we don’t want to support corporations that threaten our health, our society and our future (and of course we don’t want to support them, we are not morons. Well, most of us aren’t, anyway,) we have to check where we put our money.
We better invest in funds of Socially Responsible Companies and of sustainable companies, for example. Unsurprisingly, these responsible companies are better not only for the world but also for our earnings. Responsible Companies are usually more profitable. Sustainable companies tend to outperform others as well. Buying their index funds can be a good idea.
In addition, to widen and stabilize our investments, we can also invest in other beneficial funds, such as small and medium companies, Hi-Tech firms, and emerging markets.
Helping the world helps us too, in both direct and indirect ways.
As always, in the long run, win-win conduct is the only possible win.
The Wrong Choices
To advance both us and the world, we better put our money on helping advantageous companies’ success.
We don’t want to help disadvantageous companies. Ones that focus only on the short-term profits and disregard the future of the world and their investors.
In addition to investing in disadvantageous corporations, there is another kind of investments we don’t want to make – ones that harm advantageous companies.
Such harmful conduct is short trading (and other derivatives that bet against companies). Essentially, short trading is the opposite of the usual stock trading (which is also called long trading). It is based on the investors speculating on company’s decline instead of supporting its success – so even theoretically it is unhelpful.
Short trading is an agreement that allows investors to borrow a share and sell it. The investors pay the owner an interest for the borrowing, and later buy the share at its new price.
If the price went down over the time between the selling and the buying, the investors earn the margin between the high-price sale and the low-price buy (minus the interest of the borrowing).
However, if the price of the shorted share went up, as in average stock prices do, the investors can lose both the margin and the interest. The likelihood of losing, therefore, is higher than in long trade.
Moreover, the cost of losing can also be higher in short trading. In long trading the risk is limited to the shares’ price, because in the worst case the price can go no lower than zero. In short trading, however, a loss has no limit – the share’s price can go up limitlessly, and so is the debt to the lender.
The long’s gain, on the other hand, is unlimited, whereas short’s gain is limited to the share’s price.
More Shortcomings of Shorts
The higher risk of short trading, as it is more likely to create loss and it can lose much more money, is more of a reason why short trading is so problematic.
But the problems don’t end there.
If the price of the shorted share goes so high it reaches the amount of money the investors have, the investors must immediately sell it, no matter what the loss is. This is a short squeeze. It causes the investors to be significantly vulnerable.
Recently we saw how short trading becomes speculators’ soft underbelly. Many of the people involved in this risky, ethically-questionable short trading are the richest moneymen. They are much the same people who were responsible for the economical crisis of 2008, which cost numerous people their jobs, savings and homes. Some of the sufferers noticed that shares of companies like GameStop where short traded again and again, until more than 100% of its stocks were shorted. They advised Reddit readers to buy these shares and raised their price so much, that the rich speculators were forced into huge short squeezes that cost them billions of dollars. That’s how the Redditors took their revenge.
Contrary to the usual long trading, where both the investors and the company win, short trading first sells the company’s shares, raises their supply and somewhat lowers their price. Lowering the prices of its stocks harm the company.
Short trading, therefore, is basically a win-lose deal – the worst kind possible, if you see it from a broader perspective.
Therefore, we better keep away from short trading, for our sake, and for others’.
The Basic Responsibility
When we have money we don’t need to spend for long periods, for years, investing it in the stock market can be a good idea. If we do it consciously it will benefit us, and it will benefit the world as well.
Yet, it is our responsibility to invest money only in beneficial ways. It is our responsibility to make sure that we, and the firms that keep our money, use it to support companies that help the world. Not to destruct helpful companies. Not to empower corporations that crush our society and our planet.
We give our money, essentially, to companies that use it to create our future. It can be a peaceful healthy future, but it can also be a future of fear and hate. A future we are already creating by financing destructive firms.
So we better remember the words of Martin Luther King, Jr.,
“We…must undergo a radical revolution of values. We must rapidly begin the shift from a thing-oriented society to a person-oriented society. When…profit motives and property rights are considered more important than people, the giant triplets of racism, militarism and economic exploitation are incapable of being conquered.”
As we want to live well in this society, on this planet, we must invest our money well.
We must hand our money only to trustworthy hands.
One checking at a time.
One check at a time.