In the pursuit of above average investment returns, we talk a lot about the difference between price and value. In the simplest form, price is what you pay, and value is what you get. Lately I’ve been thinking about taking that idea outside of investment-specific circles and into a broader cultural context.
We’re living today, as every generation has before us, through a period of wealth transition. The largest population of investors in human history is now preparing financial and retirement planning to pass on the responsibilities and comforts of capital to the next generation. The process is touching every part of our society from new technologies to interest rates to employment prospects to pension reform to health and wellness. And we must keep in mind, too, that all this is still in its infancy, still culturally flexible.
Before any of us get too attached to certain benefits and assumed privileges, we must consider that the whole idea of retirement and transition planning is only two or three generations old at best. Before the longevity of life and social benefit reforms of the last century, most of the western world worked, got old for a couple brief years, and then just… well… died. We didn’t have retirements and we didn’t have transition planning -- mainly because there wasn’t enough life nor capital to look after in the first place. Since then, as a society we’ve made the most significant strides in human history towards increasing quality of life across the age spectrum. However one issue still remains. While today’s wealth transition in North America is the largest the world has ever seen in term of absolute dollars, I’m not so sure the same thing can be said about the value transition.
Money is like every other human invention: it can be created and it can be destroyed. We’ve seen central banks around the world print oodles of it since 2009 to aid the global economic recovery, and by just about equal terms watched reckless behaviours destroy much of it leading up to that panic. In a strict economic sense, leverage (taking on debt) creates new money, while deleveraging (paying down debt) takes it away. But while money can be created and destroyed, value is different. It behaves more like energy than it does like dollars; value cannot be created or destroyed, it can only be transferred. Regardless of how much money is printed or destroyed, the value of any economically productive asset belongs to that asset. Whether you measure the output of that value in dollars, yen, seashells or even space credits, the value is the important part. In more direct terms, whether I buy the shares of a $100 business for $80 or I spend $120, the value is what’s being transferred. The dollars come and go.
So in the midst of the greatest wealth transition in history, and while recognizing we’re still treading over relatively new cultural territory of “retirement”, I think the most competent navigators among us won’t necessarily be focusing on who gets the most transitory dollars. A fifty dollar bill transferred into the hands of someone who knows how to deploy it is far more valuable than a hundred dollar bill transferred to someone who doesn’t. What’s far more important than where the dollars go is the value assumed when they get there.
From that perspective, regardless of how many dollars are transferred over the next decades, the value of those dollars will still make their way to those most capable of deriving the highest economic benefit. That’s because just like energy, when you gather enough value in one place it takes on a mass and gravity all its own, attracting yet more value. Einstein is best known for discovering the conjugal relationship between energy, mass, and gravity. Some people also credit him with saying that compound interest is the eighth wonder of the world. Maybe it’s the gravitational pull of value that he was really getting at.