"Good" Assets vs. "Bad" Assets

[helmuth_hubener]

I see all the time on the forums, and see/hear elsewhere, things like:

"Gold is a bad investment"

"Bonds are worthless."

"Back up the truck! We should all buy tons of gold."

"Cash is not a smart investment."

"The stock market is a bad investment. The stock market is over-valued and is going to crash. Individual stocks in quality companies could be OK, but not the whole stock market."

"The stock market is the best investment. Stocks always outperform other investments, long-term."

"Cash is not a real investment at all."

"Gold is not a real investment at all."

"Buying stocks in today's environment is not investing at all."

"Bonds are really, really worthless. Seriously. Only an idiot would buy bonds."


All of these statements I can understand to an extent. But all of them exhibit a basic misapprehension. And so I actually disagree with all of them.

How can I disagree with "gold is a good investment" and "gold is a bad investment" at the same time? Isn't that contradictory? How can I feel that both "stocks are a good investment" and "stocks are a bad investment" are wrongheaded attitudes?

Here's how: we need to go a little deeper. Trying to sort out and label asset classes like this as "good" or "bad" is foolish. Asset classes are not "good" nor "bad". Rather, each asset class has certain characteristics. We should seek to truly understand its characteristics. Then, we can move forward intelligently.

Each asset class performs better or worse in certain economic conditions. None of them perform well in all conditions. For example, stocks will do well in a period of prosperity. During a recession, they will not. During a depression, they really will not.

Gold will do well during a time of high inflation in the US dollar. During other times, it probably will not.

Having cash on hand gives you lots of profitable buying opportunities in a time of depression. It is also good to have in a recession.

So, for success, we should not seek to figure out which assets are "good" investments and which are "bad." Instead, we should seek to understand their nature and then use them as tools to help us, in accordance with their nature.

 

[ILUVRP]

the only true investment is a guaranteed return on your money and a return of your money , everything else is a speculation .

i agree bonds are worthless as things are today , good dividend paying stocks are not so good because when the shtf companies will cut the dividend .

to me the best investment is farm land , the thing is today good farm land cost $4000-6000 acre , you can rent it at $200-300 acre , so your return would be about 5% , then there are taxes/insurance to pay , so your total return would be about 4% .

there are also 50/50 where the owner splits all costs with who is farming the land for you , you own the land and the person farming it has the equipment and does all the work . this way has more risk as the price of grain sold could go down.

everything else i consider junk speculation .

 

[helmuth_hubener]

the only true investment is a guaranteed return

Guaranteed by whom?

 

[ILUVRP]

as things are now ( everything is junk ) , by the goverment seller .

 

[helmuth_hubener]

My point is that nothing is guaranteed in this life. If

the only true investment is a guaranteed return

as you say, then you have just defined investment out of existence.

 

[Zippyjuan]

I see all the time on the forums, and see/hear elsewhere, things like:

"Gold is a bad investment"

"Bonds are worthless."

"Back up the truck! We should all buy tons of gold."

"Cash is not a smart investment."

"The stock market is a bad investment. The stock market is over-valued and is going to crash. Individual stocks in quality companies could be OK, but not the whole stock market."

"The stock market is the best investment. Stocks always outperform other investments, long-term."

"Cash is not a real investment at all."

"Gold is not a real investment at all."

"Buying stocks in today's environment is not investing at all."

"Bonds are really, really worthless. Seriously. Only an idiot would buy bonds."


All of these statements I can understand to an extent. But all of them exhibit a basic misapprehension. And so I actually disagree with all of them.

How can I disagree with "gold is a good investment" and "gold is a bad investment" at the same time? Isn't that contradictory? How can I feel that both "stocks are a good investment" and "stocks are a bad investment" are wrongheaded attitudes?

Here's how: we need to go a little deeper. Trying to sort out and label asset classes like this as "good" or "bad" is foolish. Asset classes are not "good" nor "bad". Rather, each asset class has certain characteristics. We should seek to truly understand its characteristics. Then, we can move forward intelligently.

Each asset class performs better or worse in certain economic conditions. None of them perform well in all conditions. For example, stocks will do well in a period of prosperity. During a recession, they will not. During a depression, they really will not.

Gold will do well during a time of high inflation in the US dollar. During other times, it probably will not.

Having cash on hand gives you lots of profitable buying opportunities in a time of depression. It is also good to have in a recession.

So, for success, we should not seek to figure out which assets are "good" investments and which are "bad." Instead, we should seek to understand their nature and then use them as tools to help us, in accordance with their nature.

They can be contradictory because they are projections of what people think those things will do in the future and are made by different people- not the same person. There is no agreement so one person may say gold is going to be great, others will say it is overpriced. You will agree with the projections which match your own ideas of what is likely to happen in the future.

 

[helmuth_hubener]

They can be contradictory because....

Your reading comprehension totally failed there.

 

[LibForestPaul]

They can be contradictory because they are projections of what people think those things will do in the future and are made by different people- not the same person. There is no agreement so one person may say gold is going to be great, others will say it is overpriced. You will agree with the projections which match your own ideas of what is likely to happen in the future.

Incorrect.

projections of what people think those things will do in the future

Projections of what people believe the state will do to those things in the future.

 

[helmuth_hubener]

I think this is a very fertile topic for exploration. I'd like to talk more about the different assets and how they behave. Their pros and cons.

Let's start with the asset class that ILUVRP brought up: land.

to me the best investment is farm land

"Land booms" are almost always inflation-inspired. The main exceptions are land sales resulting from new discoveries of usable natural resources -- either the discovery of the resource itself, or the discovery of a means whereby to extract resources which were previously economically unreachable. As two examples, coal-bed methane in the early 2000s made a boom in Wyoming, and improvements in fracking technology made one a little later for North Dakota. Such discoveries create sudden -- but realistic -- reasons for land value to dramatically increase.

Land appeals quite largely to income groups that don't do a great deal of investing. Especially in times of some inflation (such as now), and with the good financing offers which that inflation can bring, buying land can seem like a very attractive way to get into investing without spending a lot of money.

Land bought as part of a new large subdivision, or other new development, benefits the most from an inflation-fueled boom (such as that of the 1990s and 2000s and perhaps continuing even today). That means it also will suffer the most when that boom ends (as it did in 2006-2010, and there may be yet further for these prices to fall).

Farm land, as ILUVRP is talking about, does not benefit so much from the inflation and is not hurt as badly in the crash. However, it does not exactly prosper in such a crash, either.

Moderate inflation: So, in a period of moderate (not runaway) inflation, land will be going up in price, sometimes more than the general price level. It will also be liquid -- easy to sell. Everyone has plenty of money during an inflation, and is looking for things to spend it on.

Recession or Depression: Land will become very illiquid. You won't be able to sell it. There's usually very little building during these periods, so demand for land is extremely low. Farm land, too, like all other land, will not be in high demand, unless there is a civilization-rocking crisis leading to a general break-down of society and division of labor. Then, city life would become untenable and reverting "back to the land" as the capital structure crumbles could be the only way to survive. Something like this is most likely exactly what ILUVRP is envisioning. Am I right, ILUV? Anyway, so you will be kind of "locked in" to your land investment in a depression of recession, unless you want to sell at a loss. As long as that is OK with you, you could be able to do fine owning and renting out some farm land acreage. Keep in mind, however, that recessions and depressions are periods of tight money. Interest rates go down. There's less money in the economy. Prices either go down, or at least don't go up as fast as anticipated. All of this means that if you bought that farm land with a fixed-rate mortgage, your returns will be much lower or even negative. Everyone else's interest rate will be going down, and the amount you can charge for rent will be going down, but your interest rate expense will not go down. You may end up "losing the farm." If, on the other hand, you bought it with cash, you will not have this problem.

Runaway Inflation: The lack of a functioning currency makes all economic activity extremely difficult. Food, however, is such a basic human need, that people will, of necessity, figure out a way to buy your food. If you are able to protect your ownership of the farm land, selling the meat and produce could be quite profitable, as it has been in some historical examples -- many farmers in Weimer Republic Germany prospered handsomely. But depending on the depth of the crisis, and how intact respect for private property and rule of law remains, you may not be able to profit as much as you anticipate.

~~~

So there is my analysis of land, focusing on farm land in particular. Does anyone find it useful? Anyone have some thoughts to add?

 

[Jordan]

Farmland is a bet on:

• Interest rates
• Crop yields
• Weather
• Ethanol policies
• Local/state property taxes

Calling it a sure bet is pretty silly, IMO.

 

[ILUVRP]

Farmland is a bet on:

• Interest rates
• Crop yields
• Weather
• Ethanol policies
• Local/state property taxes

Calling it a sure bet is pretty silly, IMO.

who called it a sure bet ?

i look at farm land ( 10a - 1000a ) as a safer bet than anything , i guess people could eat their gold/stocks/bonds when the shtf , hell they could even cover up with it when it gets cold .

i found that the biggest risk of owning a farm is the taxes as you can't pick up you land and go to ireland .

the only people in america ( except for the very rich ) that are really free are farmers , they can build/burn or do anything without a permit , to me being free means more than owning a pile of gold .

 

[Zippyjuan]

Related (from April): http://www.businessinsider.com/us-farmland-bubble-2014-4

The American Farmland Price Boom Is Over

Surging crop prices helped drive up U.S. farmland prices between 2009 and 2012.
However the rate of price growth has collapsed.

"The rapid run-up in the price of farmland appears to be over," write Paul Ashworth and Paul Dales of Capital Economics.

"We suspect that the slowdown in the growth rate of farmland prices last year will develop into an outright decline in prices this year, at least in the corn belt that saw the most dramatic rise in prices."

In Iowa for instance we saw farmland prices surge 33% in 2011 and 24% in 2012. But prices climbed just 5% last year.

The key concern is whether or not we headed for an outright boom-bust cycle like we saw in 1970s and 80s.

http://online.wsj.com/news/articles/SB10001424052702304908304579563712145239966

Fed Banks Report Falling U.S. Farmland Values in First Quarter
Declines in Value of Midwestern Agricultural Land Come After Drop in U.S. Grain and Soy Prices


Farmland values fell in the first quarter in much of the Midwest, the latest sign of a downturn in the market after a yearslong boom fueled by rising commodity prices, according to Federal Reserve reports on Thursday.

Average prices for agricultural land in the Federal Reserve Bank of St. Louis's district, which includes parts of Illinois, Indiana and Missouri, fell 6% in the first quarter from the prior quarter, the bank said.

Prices for nonirrigated farmland in the Kansas City Fed district, which includes Kansas and Nebraska, declined 1.4% over the same period. Meanwhile, the Chicago Fed reported a 1% quarter-to-quarter decline, the first in five years for a district that includes Iowa, Michigan and parts of Illinois and Indiana.

The reports indicate the U.S. farmland market has softened further, after cooling last year as U.S. grain and soybean prices fell sharply amid large harvests. Farmers produced the biggest corn crop ever last autumn, just one year after the nation's worst drought in decades drove prices for the grain to record highs. Corn futures prices at the Chicago Board of Trade have fallen 24% over the past 12 months.

The slump in cropland values marks a turning point in the U.S. Farm Belt. From 2009 to mid-2013, average prices for farmland rose by half, according to federal data, reflecting one of the U.S.'s largest recent asset booms. The gains fueled concerns about a bubble, though economists have noted that farmers today carry relatively low debt levels.

The market for farmland is "lukewarm," said Jim Benham, who grows soybeans near Versailles, Ind. "Back when we were having the drought and looking at $8 [a bushel] corn, folks were a heck of a lot more aggressive than they are now."

The average value of quality farmland in the St. Louis Fed's district fell to $5,496 an acre in the first quarter from $5,868 an acre in last year's fourth quarter, according to the bank's survey of agricultural lenders.

More at link.

 

[Zippyjuan]

Land is less liquid should you suddenly need money.

 

[helmuth_hubener]

ILUVRP has made it clear he does not want farmland because he believes the price is going up. He is convinced that soon there will be "a civilization-rocking crisis leading to a general break-down of society and division of labor" (quoting myself). If he is right, owning a working farm would probably be a good thing.

 

[ILUVRP]

i did own a farm in illinois , it was about 200a , now i live in phoenix area to be close to my daughter-grand kids--great grand kids .

the only time i felt free is when i owned that farm , its sort of like having your own country and you are the king of it .

i agree they are not very liquid ( which can be said about lots of things ) but everything is liquid at a certain price .

 

[helmuth_hubener]

i did own a farm in illinois , it was about 200a , now i live in phoenix area to be close to my daughter-grand kids--great grand kids .

the only time i felt free is when i owned that farm , its sort of like having your own country and you are the king of it .

i agree they are not very liquid ( which can be said about lots of things ) but everything is liquid at a certain price .

I hope you are able to have one again someday. You only live once! Do it!

 

[Peter4Paul2016]

This is why you Diversify!

 

[helmuth_hubener]

This is why you Diversify!

Yes! And if one diversifies intelligently, consciously, with an eye to his goals, he can get a variety of the benefits available from the different asset classes and at the same time reduce many of the downsides and pitfalls of those same asset classes that he would have if he invested in them alone.

True synergy in action! The whole really can be greater than the sum of its parts!