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What Is An Investment?

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A recent debate I've been having brought up the question in my mind of what actually constitutes an investment. This is something that I assumed that I knew having learned what I know from various textbooks, taped lectures, etc. etc. that I needed for my career. However, I'd like to "chew" on this concept with other forum members who are much better with epistemology, specifically definitions, than I am. My own understanding of investing is some asset or some thing which you can contribute money, time, etc. to, and you have an expectation of reasonably predictable appreciation and income in the future from that thing you are investing in. I'm not sure if that captures the essentials though.

It's been a while since I've listened to it, but I also think I am generally in agreement with the definition presented by Yaron Brook in a taped lecture I listened to a few years ago on investing. A quick search online brought up Ayn Rand's understanding of the concept "investment":

If a man does not consume his goods at once, but saves them for the future, whether he wants to enlarge his production or to live on his savings (which he holds in the form of money)—in either case, he is counting on the fact that he will be able to exchange his money for the things he needs, when and as he needs them. This means that he is relying on a continuous process of production—which requires an uninterrupted flow of goods saved to fuel further and further production. This flow is “investment capital,” the stock seed of industry. When a rich man lends money to others, what he lends to them is the goods which he has not consumed.

This is the meaning of the concept “investment.” If you have wondered how one can start producing, when nature requires time paid in advance, this is the beneficent process that enables men to do it: a successful man lends his goods to a promising beginner (or to any reputable producer)—in exchange for the payment of interest. The payment is for the risk he is taking: nature does not guarantee man’s success, neither on a farm nor in a factory. If the venture fails, it means that the goods have been consumed without a productive return, so the investor loses his money; if the venture succeeds, the producer pays the interest out of the new goods, the profits, which the investment enabled him to make.

Observe, and bear in mind above all else, that this process applies only to financing the needs of production, not of consumption—and that its success rests on the investor’s judgment of men’s productive ability, not on his compassion for their feelings, hopes or dreams.

The last paragraph is of special significance to me because over the past 5 or so years, it has led me to some interesting ideas (at least to me). One of them being that real estate, when purchased as an owner-occupied residence, is not actually an investment because it doesn't generate income and as I understand it, it doesn't appreciate in real terms or wouldn't if there was no government intervention into the market. Though, the common perception of all real estate purchases is that real estate is an investment. Note that I'm not talking about whether owner-occupied real estate is a good or bad investment, but whether it constitutes an investment at all. I also want to express that I think commercial real estate seems to be an investment, or a quasi-investment, simply due to the rents being generated...though it may not always be a great or even a good investment.

As far as I understand real estate, it seems to preserve wealth more than creating it as such. It also seems like, to the extent that real estate does appreciate, it is due to government intervention in the housing market through entities like the FHA creating artificial demand, low interest rates, etc. etc.. I've often wondered if, left on a free market, real estate in any given area would increase in value until leasing became cheaper/more economical in that area and then real estate prices would even out and remain relatively stable, neither appreciating nor depreciating very much. Or, maybe they would gently swing back and forth depending on whether it was a buyers or renter's market.

In any case, what I'm wondering is if anyone wants to help me work through capturing the essentials of the concept "investing" and WHY those essentials are the essentials? In particular, the only issues I seem to be having is where to place "real estate", though at this point and for quite some time, I've never thought of owner-occupied as a true investment. It's interesting that even financial planning textbooks, and books on investing, often have somewhat open ended definitions for these terms and opt to define them ostensively.

Edited by prosperity

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Quick point on Real Estate - it isn't just about appreciation.

Being a landlord, despite it's inherent PITA issues, can be extremely profitable, and developing land for new uses creates wealth. In fact, developing land into an apartment building creates the wealth in the form of ongoing rent payments.

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It may help to read "Rich Dad, Poor Dad" (RDPD) by Robert Kiyoaski. The book cultivates the mind-set that applies to investing.

In his terms, you can buy investments ("assets") or doodads. An asset is anything that makes money for you. You have more money at the end of the month (or year) because you own that thing. For instance, stocks that pay dividends are an asset. Doodads are everything else; a home, a car, etc.

Your personal residence is not really an asset because you spend money on it every month. It may happen to appreciate, but that is not its primary purpose. Its primary purpose is to give you a place to live. Whether you realize actual gain is complicated by tax benefits and interest; I suspect most people don't realize a real gain on their property. At best it becomes a kind of deferred savings account that you happen to be able to live in.

Caveats:

RDPD is not good for specific practical advice. RDPD gets you motivated. It's also a hook to get your buying more books. For concrete advice, go to places like The Motely Fool.

Most people also need a car to live and get to work. I'm not saying you shouldn't have one! However, the money spent in a car is not considered an "investment"; it's more a "necessary expense".

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Quick point on Real Estate - it isn't just about appreciation.

Being a landlord, despite it's inherent PITA issues, can be extremely profitable, and developing land for new uses creates wealth. In fact, developing land into an apartment building creates the wealth in the form of ongoing rent payments.

Yes, exactly! This is why I wanted to make a distinction between owner occupied and commercial or "business" oriented real estate. So, on being a landlord and running a business, I could be swayed to think of that as "investment".

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It may help to read "Rich Dad, Poor Dad" (RDPD) by Robert Kiyoaski. The book cultivates the mind-set that applies to investing.

In his terms, you can buy investments ("assets") or doodads. An asset is anything that makes money for you. You have more money at the end of the month (or year) because you own that thing. For instance, stocks that pay dividends are an asset. Doodads are everything else; a home, a car, etc.

Your personal residence is not really an asset because you spend money on it every month. It may happen to appreciate, but that is not its primary purpose. Its primary purpose is to give you a place to live. Whether you realize actual gain is complicated by tax benefits and interest; I suspect most people don't realize a real gain on their property. At best it becomes a kind of deferred savings account that you happen to be able to live in.

Caveats:

RDPD is not good for specific practical advice. RDPD gets you motivated. It's also a hook to get your buying more books. For concrete advice, go to places like The Motely Fool.

Most people also need a car to live and get to work. I'm not saying you shouldn't have one! However, the money spent in a car is not considered an "investment"; it's more a "necessary expense".

Yes, I am familiar with RDPD and motley fool and a lot of other financial-related books and sites. What I'd like to explore is the formation of the concept "investment" (perhaps this should have gone into the "epistemology" section of the forum????), what are the essentials, an objective definition, etc.. I think if I said "stocks are an investment", no one would disagree. Some might argue over whether they were good or bad investments, but everyone would agree that they constitute an investment.

What I am looking to "chew" over is the concept "investment" and then how it relates to "residential real estate" or "owner-occupied real estate" or however you wish to phrase it.

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What I am looking to "chew" over is the concept "investment" and then how it relates to "residential real estate" or "owner-occupied real estate" or however you wish to phrase it.

I think you need to start, as Rand implicitly does, with the closely related concept of "savings". Savings is wealth produced and not yet consumed. Investment is savings used to produce further wealth. There are other things you can do with savings -- you can just keep them, for example, and consume them at a later date.

Note that 'used to produce further wealth' may include non-obvious behaviors. Consider speculation -- the process of acquiring a good in the present because you believe it will be more valuable in the future. Depending on the reason for the projected increase in value this may well constitute investment -- speculators shift the consumption of goods through time in exactly the same way that shippers shift the consumption of goods through space, and the process of moving goods to places and times where they are more valuable is productive.

In general, this view suggests that things like owner-occupied real estate and government bonds are not strictly speaking investments, even if they do typically increase in value or return an income stream. 'Increasing in value' is not a defining characteristic of an investment. In a division of labor economy the trade value of a good is a function of what others are willing to give you in exchange, and that can change even if you just stuffed the good under your mattress for 20 years.

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I've always been fond of Benjamin Graham's definition of investing:

"An investment operation is one which, upon thorough analysis, promises safety of principal and an adequate return. Operations not meeting these requirements are speculative."

Of course, this definition's purpose is just to differentiate between investing and speculation. I think 'investing' is the allocation of capital such that it aids the production of more capital. In this fashion, owner-occupied real estate is not an investment. Similarly, as Khaight suggested, government bonds are not 'investments.'

Another epistemological investment question I've been grappling with is about the nature of what a 'stock' really is. A stock is commonly known as "fractional ownership of a business." But, the basis or fundamental quality of 'ownership' is 'ability to control.' Yet, owning a stock doesn't mean you can control a fraction of the equity. All you can do is vote. So can it really be called "fractional ownership?" This might seem unimportant, but fractional ownership is a fundamental axiom of value investing.

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I've always been fond of Benjamin Graham's definition of investing:

"An investment operation is one which, upon thorough analysis, promises safety of principal and an adequate return. Operations not meeting these requirements are speculative."

Of course, this definition's purpose is just to differentiate between investing and speculation. I think 'investing' is the allocation of capital such that it aids the production of more capital. In this fashion, owner-occupied real estate is not an investment. Similarly, as Khaight suggested, government bonds are not 'investments.'

Another epistemological investment question I've been grappling with is about the nature of what a 'stock' really is. A stock is commonly known as "fractional ownership of a business." But, the basis or fundamental quality of 'ownership' is 'ability to control.' Yet, owning a stock doesn't mean you can control a fraction of the equity. All you can do is vote. So can it really be called "fractional ownership?" This might seem unimportant, but fractional ownership is a fundamental axiom of value investing.

...well, stocks do not represent full fractional ownership. They represent partial ownership with limited liability. Always have. Remember that corporations themselves are set up with limited liability in regards to all of the owners, officers, etc. This translates over to stockholders, creating another layer of limited liability. It also creates restrictions on what partial owners can and cannot do. I think they're still investments.

This is why you can't go down to the business's office and just start walking out the door with a chair or a ream of paper. Likewise, if the business goes bankrupt, the creditors can't come after your personal assets. Limited liability is a key feature for stocks. If that element didn't exist, then I don't know as if anyone would invest in stocks.

As to the definition, I'm not sure that that Graham captures the essentials-his abilities as a stock analyst notwithstanding (and I do thing he is probably the best there is when it comes to stock analysis). I think I would tend to agree with what I know about the concept of investing based on what Ayn Rand had to say about it. She seems to have a good explanation for it.

********

@ khaight, thank you for bringing this up. The opposing argument to mine focused on, and I am paraphrasing, putting up any amount of capital, for any purpose, in the expectation of any profit. To me, putting up any amount of capital, for any purpose, in the expectation of any profit doesn't really capture the essentials either.

I don't want to focus on, or even mention the individual that brought up the other side of the argument, because I don't think it's important. I do want to address only the substance of the argument though, because it is a common argument that is made, I think. Here is the exact, word for word, argument in opposition to my definition:

"Investing" means the laying out of capital (any present value, such as time and effort, money, one's good reputation, or bricks) to any purpose (such as building a car or a car rental company or going fishing for toothfish) in the expectation of any kind of profit (value in excess of the outlay in capital), in kind or otherwise (such as getting more value in milk from raising goats than the capital put into raising the goats).

Investing is as old as hunting, agriculture, and building mud huts. Even animals do it.

However, it sounds like you are saying that the essential or defining characteristic of "investment" is the financing of future production. Or is it financing of the needs of production? (is there a difference?). Do I understand you correctly?

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Of course, this definition's purpose is just to differentiate between investing and speculation.

I'm still mulling over whether investment and speculation are always mutually exclusive.

A stock is commonly known as "fractional ownership of a business." But, the basis or fundamental quality of 'ownership' is 'ability to control.' Yet, owning a stock doesn't mean you can control a fraction of the equity. All you can do is vote.

You own the share of stock, and you have total control over it. You can keep it, sell it, use it as security for a loan, bury it in the yard, whatever. One of the things that ownership of a share of stock allows you to do is vote in shareholder elections, and you have full control over your vote. The assets of the corporation are deployed in accordance with the results of the aggregated votes of all the shareholders.

In principle this is no different from any other kind of joint ownership. My wife and I hold title to our house in joint form -- to sell or mortgage it requires each of us to consent. So neither of us has the ability to control the use and disposal of the house on our own -- but clearly each of us owns something. We stand in a different relationship to the house than, say, you do.

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I think the "profit seeking" description captures the same essence. Investment means putting some value to use in a way that you end up with more total value. Another way of saying the same thing is: using a value productively (i.e. as a factor in production) rather than as an end value. Saying that you will start with value 'x' and end up with (say) 1.2x is similar to saying you will use 'x' productively, except that it is more abstract.

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However, it sounds like you are saying that the essential or defining characteristic of "investment" is the financing of future production. Or is it financing of the needs of production? (is there a difference?).

The definition you cite strikes me as a bit vague in its use of the phrase "expectation of any kind of profit". If I buy a government bond, for example, there is a sense in which I am expecting 'profit' -- I expect to get my money back plus some more in the form of interest. But if I'm expecting the government to consume the money I give them, and then pay me back my principal and interest via future taxation, there is another sense in which I am not expecting profit -- I am not expecting any kind of increase in the overall supply of wealth in the economy for which I can trade my money. So a great deal turns on what is really meant by 'profit'. If we understand profit in terms of real wealth, then I think that other definition is quite similar to Rand's -- investment as the use of capital (unconsumed wealth) with the intention of making a profit (producing additional wealth in excess of the capital consumed). On the other hand, if we understand profit in purely monetary terms we can confuse receiving money with receiving real wealth when the two are not in fact the same thing -- particularly under a fiat currency regime.

The addition of intention is a good refinement. It's obviously possible to make a bad investment -- to deploy your savings in a way that you think will produce wealth but which in fact does not. Webvan stock, anyone?

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It's obviously possible to make a bad investment -- to deploy your savings in a way that you think will produce wealth but which in fact does not. Webvan stock, anyone?

This points at something essential that I thought was missing from OP's initial definition. The key trade off for the potential for returns is risk, so I would probably describe it as "purchasing a potential gain with a potential loss," and then define an investment as "good" or "bad" with other descriptors. The original post seems more like a specific sort of investment. "reasonably predictable appreciation" for example is not what I would consider essential to the concept, investment, per se. That might more accurately be described as "a sensible, low risk investment" That's my 2 cents...investment. :)

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Thank you everyone for your input. I am more convinced that "investment" is a subcategory of "savings". That things like "time", for example, cannot be invested because "time" is a measure of motion. Investment implies that you have something to invest. To invest, you would need there to be "extra" or "excess" over what is being consumed. But time, in this example, is not really subject to "excess". It's not produced, it simply is. The same could be said for land, or gold, or any other metaphysically given fact of reality I suppose. But, this would create an interesting situation in that while land would not be "investable", a real estate business could be, simply because of the rents one collects. But the investment is the business of renting, not the real estate as such. Does this entire argument hold up?

One question I have is what accounts for the value of art? Because, art is often seen as an "investment". Yet, I'm not sure if it actually has any real appreciation. Sure, the socially objective value of some pieces of artwork amounts to more than others. Some artists are also worth more than others in terms of skill and ability. But, what accounts for the price of the Mona Lisa vs the price of a local artist selling a portrait of a woman for $200?

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Time is invested when one uses it as a means to creating a future value, as opposed to using it as an end to enjoying some value.

Assuming investing is a subcategory of savings, which I think it is, how can you invest time? That is, investment requires that you invest out of savings. Or to say another way, investing requires something produced in excess of consumption that becomes available for future production. How do you create "savings" in regards to time? I realize people use phrases like "investing my time" or "free time" or "extra time", but in a literal sense it doesn't seem to make a lot of sense (at least as far as my understanding of the concept). If I am to assume that time is the measurement of motion, I guess another related question would be how do you produce and consume it? Does it apply to all forms of measurement? Can you consume and produce pounds? Or inches? If so, can you invest miles or kilograms?

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Assuming investing is a subcategory of savings, ...
I see investing as one thing you can do with savings.

..., investing requires something produced in excess of consumption that becomes available for future production.
Investing requires some resource/value that is invested rather than consumed. In the context of material things, such a resource would typically be produced.

I realize people use phrases like "investing my time" or "free time" or "extra time", ...
What they mean is that they are investing their effort, i.e. spending their time on one thing rather than on another.

I'm not sure where you're going with this exploration. Why bother starting with the term "investment" and seeking referents for it, instead of the other way around.

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I don't buy Graham's differentiation between investment and speculation. Any investment involves risk, and the interest earned (for instance) has to justify the amount of risk anticipated. Purchasing AAA bonds from company X is not more or less an investment than purchasing ABB bonds from company Y.

At first glance you might agree with SWNerd that expectation of profit captures the essence of investment in the context of money's abstraction of goods and production. But...

The question I still have is whether purchasing a house is an investment. If you consider that housing is a facilitator for production (an indirect factor/cost of labor), and that the value of that resource will gain value, that is, will be required for future production, then, if the productive capacity of an area is expected to increase, then the demand for housing in that area will increase in order to attract workers from other areas. Therefore, speculative purchase of Real Estate could be considered investment in the future production of an area.

Problem is, once you go down the road of abstracting future production as the defining characteristic of investment, could you then say that buying a loaf of bread is investment, since the energy you gain from it will go into your own future productivity? Is buying cheap consumables now in the expectation that their price will rise an investment in your ability to invest saved money later on? Is any exchange to be considered divestment from the relinquished good or service, and investment into the gained good or service? If so, you've smeared all meaning from the term.

Contrariwise, is purchasing stock in a company on an exchange, when that purchase in no way puts new resources directly into that company (but may provide an incremental increase to the means by which it can raise money later) really an investment? Or is it merely speculation (the purchase of a good on the expectation that its price will rise)?

The defining characteristic of an investment would seem to be the conversion of a relatively near-term consumable resource into a (consumable) resource intended to increase production in the relatively far-term future. The saving of grain for seed stock, or the exchange of seed stock for aluminum for a silo, or the conversion of aluminum materials into an aluminum smelter, are all investments. But the conversion of an aluminum smelter into into sheet aluminum, or seed stock, or grain for this winter's stores, or tonight's feast, are all divestment for nearer-term consumption. Any of these exchanges might be desired for survival or comfort, and may even show monetary profit.

So, in my view, profit is not the defining, but the motivating, characteristic of investment. Relative futurity is the defining characteristic.

Edited by agrippa1

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I guess one can begin by asking the question, 'What facts of reality give rise to the concept of investment?' Rand answers this in the OP's quote (in the lexicon): "nature requires time paid in advance..." That is, production is a linear process where value is continuously added from start to finish. In order to create a high value, one must spend the entire time required to produce it. Or, as Rand puts it: "This means that he is relying on a continuous process of production—which requires an uninterrupted flow of goods saved to fuel further and further production."

In order to start producing a value, man must either start from scratch, or if he already has existing value stored in money (gold), he can use the stored value as a starting point in production and start much further ahead. Thus, an investment is the name given to the act of using stored value to create more value. It's the initial "flow" of value that is required in the act of producing a higher value. This is why 'emerging markets' need investment to grow quickly. Notice how the American economy has reached a high level of production compared to other areas of the world, but the so called 'emerging markets' are catching up extremely quickly. This is because they have the advantage of using the capital of the more mature markets- capital that America had to create itself.

I hope that makes the concept of 'investment' clearer. It's the use of existing value as a starting point in order to create more value. How this applies to real estate investments is along the lines of what the OP thought in the beginning. The purchase of a house in order to live in it is NOT an investment. It's the consumption of capital because it's not a cash producing asset. At the very best it's a store of value (although I'm not even sure of that). On the other hand, purchasing real estate as a rental property IS an investment. You're committing your capital into a property with the expectation of using that property to receive cash from a renter. Another example is gold. Gold isn't an investment because it's not producing. It's just storing.

don't buy Graham's differentiation between investment and speculation. Any investment involves risk, and the interest earned (for instance) has to justify the amount of risk anticipated. Purchasing AAA bonds from company X is not more or less an investment than purchasing ABB bonds from company Y.

I now agree with you. Graham's reasoning is wrong, but I still believe that there is a valid differentiation and that the concept of speculation, as opposed to investment, is useful. Since investment is the process of committing stored value to gain a head start in the production of greater value, this rules out certain financial actions from being labeled 'investments.' For instance, buying a stock based on technical analysis is not an investment because it's contributing capital with the hope that, for reasons unrelated to production, the value of the purchased asset will rise.

is purchasing stock in a company on an exchange, when that purchase in no way puts new resources directly into that company (but may provide an incremental increase to the means by which it can raise money later) really an investment? Or is it merely speculation (the purchase of a good on the expectation that its price will rise)?

Yes, it's still an investment because you're contributing your capital to the company by proxy. The amount of capital owned by the company hasn't changed, the ownership of it has. Now, instead of the seller's capital, it's your capital that is invested.

Problem is, once you go down the road of abstracting future production as the defining characteristic of investment, could you then say that buying a loaf of bread is investment, since the energy you gain from it will go into your own future productivity?

Once you think about investing the way Rand describes, you can see that buying bread isn't investing. Consider a man opening a business to produce shoes. Buying bread is necessary for his life, so in that sense it's necessary for production. However, once the bread has been purchased, the man is no better off in the creation of the business. The bread has not contributed anything to the flow of value (or 'flow of goods') that Rand describes. If however, the money for bread was used to help purchase the company headquarters, you could say that it was used such that the man was closer to opening the business. That would be an investment.

And just a final point on distinguishing investment from saving: Saving is accumulating value. Investing is contributing or arranging the accumulated value such that a higher level of production is possible.

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This is a good question, and it's why economics is a dead science in its current utilitarian, equilibrium-seeking, historical modeling through econometrics and stochastic analysis format.

Think about it like an economist (the reasoning skills of economics, in basic form, are quite powerful - tools like: "all else being equal" and making assumptions to help distill economic concepts).

Why in the hell would someone not consume something that they can? Utility (Utilitarian, as I used it earlier, refers to a social policy of maximizing 'society's' utility, and is an awful concept. Utility as a concept refering to the abstract personal benefit received by doing something, is a powerful tool) - sorry - utility is gained by consuming additional units of a thing even if that utility is diminishing marginally. That means that even if, after eating ten cookies, an eleventh cookie will hardly benefit you, it will still benefit you more than if you hadn't eaten it. Keep in mind here we're talking about a simplified economics-think world (without weight gain or full bellies).

If I made a million dollars, and bought a half-million dollar house, why would I not also buy a half-million dollar yacht? You might say: "Well, next year I won't make any money, and need to pay property taxes and bills." But, economic-think also extends across time periods as dynamic multi-year models are used.

To give an analogue: imagine you have no heirs, and after the year's up, you'll die. In fact, imagine that the whole world will end in a year. Why in the hell would you not buy the yacht?

Okay, imagine that you'll live forever, but that each year is the same as every other year. There are unlimited resources, but no children - everything's always the same. Machinery depreciates, it breaks down. So every year you 'invest' money in order to rebuild the machinery. It turns out, that that is not investment. That is called 'maitenance' (my word). In fact, putting money in stocks is not strictly 'investment' it's 'savings' (economic word).

Investment is taking a surplus, and putting it into the future, to create a proportionally greater surplus at that time. The only reason you'd ever 'waste' your money (the boat, remember, it's waiting for you) on the future, is if you could get even more money out of it.

Because of hierarchy of values, present consumption is always worth more than future consumption (because you have to consume now in order to 'get to' tomorrow). So defering value into the future requires a substantially greater return than what you'd get in terms of utility today.

Now that that's been said, consider the implications. First, only Objectivism has ever offered an epistemology that can explain how investment really works. If you aggregate all the values, if you follow activities to their sum, the process of investing/saving/etc. over the years are just steps in a chain of ultimate prodution and consumption. Investment is an effect that occurs in an attempt to reach optimal production (equal to ultimate consumption). But that optimal level might occur only after the passing of future years. In other words, it exists in reality, but not within our history or knowledge. Only Objectivism can subsume tomorrow into today.

Think of it like the Marxists (I did this in another thread): the poor, under Capitalism, give their 'share' of wealth to the rich - supposedly. In other words, Marxists like to talk about how, because technology (capital they call it) takes inputs and multiplies the resultant output, capitalism 'centralizes' the share of wealth in society to the owners of the machinery. Ayn Rand correctly asked: (not an actual quote) "Why and how do the capitalists build the machines in the first place?"

That's the most important question. If you really believe the utilitarian economic model, then Capitalism and Industry are bust. Eventually, if Marxism is true, the wealthy who supposedly have all the poor peoples' money locked up - paying them dismal wages - have to actually spend that money (remember, the boat is waiting). If the vast majority of people in society are miserable proletariat, then that's where the money is going to be spent. And guess what? Maybe the bourgeoisie will pay the poor to stand in as chess pieces in a game of human chess, or act as living ottomans before their thrones. It doesn't matter, because these poor then are getting paid. And in turn, they spend that money elsewhere. Basically, over the long run, the 'wealthy' have to either 'redistribute' their wealth, or basically everyone dies.

Marx admits this, predicting 'crises of overproduction' spurring communist revolution. He was sort of right! If a capitalist builds one factory, once, then eventually he'll have to pay everyone the same as himself or else (in the long run) his workers won't be able to afford to buy what he produces.

Granted, this is assuming everyone's a rational actor. Still, it's a true economic fact.

Unfortunately (for the Marxists), when wealth is concentrated to the wealthy, they take the 'excess' (which in the long run has to go back to the poor, or the system collapses) and invest it in ever more productive measures.

And so, what they've created isn't a system of 'capital' (a static set of factories to give them temporary wealth - as much a redistribution as if the government gave it back), they've created a system of investment that spurs unending growth.

"Capitalism" is all about continued investment. Yes, if we are all done building any new technology or new factories, or new infrastructure, and done investing new money, then wealth has to be redistributed forcibly or else people will eventually start starving to death. Isn't it ironic, then, that the socialists demand we stop investing and building and growing FIRST. THEN they ask for redistribution.

That's why "Why were factories built in the first place?" is the MOST important question. The factories weren't built in a one-shot effor to temporarily extract gains from the poor over one lifetime. They were built in an ongoing cycle of investment extending across human history. Without continued investment in new and better modes of production, humanity is forced to rely on the immediate gifts of nature. Yet, as Ayn Rand pointed out, we aren't equipped to thrive in that environment. Recall: a baby human will crawl out over a glass surface laid over a tall height, a baby animal will not. Humans have little in the way of sheer instinct to survive off of nature. We survive through reason, and through a continued attempt to best our surroundings, and build and create more and better ways of using the resources available to us. The famines and wars throughout history are proof of this: they are 'hiccups' in that cycle of investment. They don't condemn it, rather they prove its utter necessity.

Puts the environmental movement in a new perspective too, huh? The only alternative to constant growth is death: fast death, or slow and steady death. The sustainability movement aims for the latter, but will inevitably discover the former (since our world of 6 billion has been built on such intensive industry).

In fact, population growth is important (if it occurs properly, as a 'sound investment'). With population decline, you have to have huge leaps in productivity to stave off deflation (the clearest real world example is in Japan where robots are being envisioned to help care for the elderly). By the way, since I'm on a 'roll'. Did you know some economists have proposed making the Yen an electronic currency so that people can't keep savings under their mattress, and banks can apply negative interest rates? Shows how well academia 'gets' the economy.

And so, I'm done really. Investment is a continued process of growth. It has a dynamic identity - it is defined over time, not in a given moment. Marx, and the collectivists, define capitalism as 'industry': concentrating wealth in order to gain in efficiency, in order to extract a greater share yet of wealth from society's 'pie'. But capitalism is not 'industry', industry is made possible by capitalism. Capitalism is distributing a share of wealth from today, into tomorrow, by recognizing that IN REALITY wealth is something that exists ACROSS TIME. Capitalism makes the poor richer and the rich richer. The poor 'distribute' their wealth into tomorrow for a greater gain. The rich take a premium for facilitating it.

Empiricism can't handle that, which is why Marxism was born in England, and then Europe romanticized it into nihilistic nonsense, whereby it was retransmitted back to the American university where our humanities departments aren't taken seriously by our science departments except in the cocktail lounge, boardroom, and halls of government (see Frankfurt School).

For today's world, the biggest destroyers of capitalism are: limitations on the development of technology, malinvestment of funds for technology (federal funding of universities, 'green' technology, 'social' policy), limitations on energy development and exploitation, arbitrary limits and impositions on the growth and evolution of capital (antitrust), pointless and romantic life goals for generations of youth (save the world, help other people, save the environment) that divert productive energy away from production, policies that encourage investment in sub-optimal or prohibitive uses of new frontiers.

One comment on that: the most, far and away, important near term effort for a long term goal that we have to be pursuing is the development of near space resources for commercial exploitation. I'm talking the moon, asteroids, that sort of thing. I challenge you to read a bit about NASA's history. You had people (Al Gore - no really) who made decisions at every step along the way in order to make the Space Shuttle as ineffective and expensive as possible. This ensured big budgets for petty science, and the oppressive crowding out of any private endeavor. The human capital and minds were sucked into NASA, the capital and Boeing and Lockheed were sucked into NASA: other attempts were ridiculed and underfunded and understaffed. Plus, international and federal law were designed to prevent the commercial exploitation of space. It's really an outrageous 'hidden' history. But so is the story of capitalism in general, right?

Yes.

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However, once the bread has been purchased, the man is no better off in the creation of the business. The bread has not contributed anything to the flow of value (or 'flow of goods') that Rand describes.

The bread will be converted to energy which is necessary for the man to pursue business. The amount of value produced by that energy is expected to be greater than the cost of the bread. It is no different, conceptually, from the purchase of fuel oil with with which to run the machinery of a business, or, extending the concept, purchasing the raw materials, or even the capital equipment.

The only difference between the examples, from an investment definition standpoint, is the time frame in which the "investments" return value. I'm not arguing that buying bread is an investment, only that our definition of investment must not subsume actions which we do not consider investment. Buying bread, vs. buying sandwiches for immediate consumption, can be considered an investment, but only in a very limited context.

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...what actually constitutes an investment.

In any case, what I'm wondering is if anyone wants to help me work through capturing the essentials of the concept "investing" and WHY those essentials are the essentials?

Great question Prosperity!

If you’re looking for a generic definition of an investment that would apply to all the different types of investments, I would start by putting together a list of all the different types of investments one could have then start abstracting away their differences until you end up with one definition that applies to all the different types.

A speculative investment is one type of an investment. Unlike a bond that promises to pay a 3.00% yield, a speculative investment makes no such promise so it would be impossible to compute an expected return. Beanie babies generate no cash flows but if you buy one in the hopes that someone else will come along & pay you more than what you paid, you have made a speculative investment.

A capital investment is when a producer purchases capital goods (the means of production) in the hopes of making a return.

Investments can be made with your own money (your savings) or with borrowed money (someone else’s savings or even credit the Fed created out of thin air).

To define “investment” you would need to determine what speculative investments, bonds, and capital investments have in common. In all cases you are sacrificing current consumption (of your own money or someone else’s money) to buy an asset in the hope of earning a return. Note that savings & investment are not the same. If I bury cash in my back yard or hide it under my mattress I am saving but I have not made an investment. Investment is a form of spending. If I deposit my money in a bank I have purchased an earning asset (savings account) that will pay me a return (interest).

If you want to include human capital investments of your time in your definition of investment you will need to generalize your definition even more. At that point, the only thing that all investments have in common is a sacrifice & a hope of making a return on your investment.

By investing in your children, you sacrifice your time in the hopes that you get a fulfilling relationship with them in return. Hope that helps, or at least gives you food for thought.

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real estate, when purchased as an owner-occupied residence, is not actually an investment because it doesn't generate income...the only issues I seem to be having is where to place "real estate", though at this point and for quite some time, I've never thought of owner-occupied as a true investment.

A principal residence is pure consumption. You are consuming the rent income you could be earning on it and every month you live there represents an opportunity cost.

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