Savers vs. Investors
Most people are not investors.
Now, don't get me wrong, 58% of Americans own stock (and probably a higher percentage through their 401ks), but even the vast majority of those who own stock are not investors.
They're savers, at least according to Cullen Roche.
This idea from the book Pragmatic Capitalism. It's helpful framing for how to think of your approach to your portfolio.
Let's look at the core concepts: consumers, producers, savers, and investors.
- Consumers: spend money to buy goods or services to use
- Producers: spend money to create goods or services for others to consume
- Savers: accumulate money for future use
- Investors: spend money for future production
From Cullen Roche:
If you earn some income that goes unspent you are simply saving. If you use some of your income to buy a sandwich you’re spending on current consumption. But if you’re the entrepreneur who owns the sandwich shop and you buy a machine that makes sandwiches then you’re spending on something that enhances your future production – you are actually investing, or spending for future production. If the sandwich shop goes on to do great things then the sandwich company might raise capital so they can invest in more sandwich making machines. They might even issue stocks or bonds to do this. These instruments are issued to finance the sandwich company’s investment spending. And when these shares trade on a secondary market like a stock exchange, they are financing nothing. They are simply being exchanged at values that the buyers and sellers perceive the sandwich company to be worth.
The kicker here is that the issuance and exchange of these shares can finance future investment, but is not actual investment. It is, more properly, a simple reallocation of savings (unspent income) which finances investment spending. When you buy shares of Apple you are not spending for future production. You are reallocating your savings from cash to stock. If you happen to finance investment spending at say, an IPO, then you’ve reallocated your savings so a firm can then spend for future production.
Many people just want to grow their savings and reallocating your savings to stocks is one way to do that. From Roche, the goal of savings is to 1) protect us from loss of purchasing power (i.e. the ability to maintain lifestyle during periods of low or no income) and 2) protect us from permanent loss of funds (i.e. we don't want that bank account to hit zero). Because of the liquidity of stock investing, it works much in the way of savings with a higher potential upside.
Investment though, at its core according to this definition, is about providing capital (spending) to create goods and services for others to consume. In short, your goal is to use your capital to help producers, produce.
When I came across this concept, it made me think of my overall "investment" strategy differently. For the vast majority of people, the greatest investment you can make is to invest in yourself. You can grow your income faster than anything else.
It's also important to consider investing directly in businesses by starting them or doing venture investing/lending. To really invest, you need to be in the primary market vs. the secondary market.
There's lots of other good gems in the book and blog, particularly helping you understand what is money and macroeconomic trends. Not the best written but strong information.