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From Saving To Wealth: Assets For All Time

During different stages in life, we question what we are, where we come from, where we are going, and why do we work or study. Just like Diogenes in the barrel. By the way, Alexander the Great supported this approach. When he was asked what he would like to be he answered: "If I was not Alexander, I would wish to be Diogenes".

There have been many philosophers in history for which philosophy had been their lives work. Intellectual labor is common for great minds. As a rule, these minds worked hard and efficiently. The following is for those who love and respect their own work as well as the work of others.

Our work is always creating something: ideas for the future, products or technologies, harmony in nature, future for ourselves, our family and children. A person's natural desire is to leave something after he has gone, through realizing his sense of value, to leave something that would live and shine through the ages. Cinema masterpieces, music hits, bestsellers in literature, records in the Guinness book are all realization of one's sense of value. For most of us, it becomes a priority after one is dressed and full.

Within the development of one's career, a man comprehends the wish to give a better start to his children and family. One starts pondering over something to pass on to his descendants. The most rational thing is to pass on knowledge or the possibility to gain it. Here the matter of creating savings comes in, that is, creating wealth. How to realize it? How to save? What is the best form to pass on the wealth?

Deposits are the cheapest source of financing for banks. Most deposits in international banks do not cover inflation in domestic currency. Meanwhile, inflation grows. Looking back into history, according to "This Time is Different" by Kenneth Rogoff and Carmen Reinhardt, the median inflation in the world between 1500 and 1799 was 0.5% per year, 0.71% between 1800 and 1913, 5% in the 20th century (1914 - 2006), the century of uncontrolled money printing. The gold standard was actually suspended some 40 years ago, which means that even though a 5% rate of inflation did not happen in a day, the beginning of the century was less inflationary than its end. The worst is yet to comeā€¦

Therefore, deposits do not create but destroy one's wealth. The main conclusion we may draw is that wealth should be kept in assets, not in cash. In the Forbes ratings, we see people whose wealth is regularly re-calculated. It is indeed calculated in money value though, in reality it is the cost of assets that changes.

Some may stand up for real estate. Prof. Jack Francis, Baruch College, and Roger Ibbotson, Yale University, show the numbers of latest generations: dwelling realty yielded 8.6% on average annually, commercial 9.5%, while investments into stock provided 13.4% annual income. The conclusion seems obvious.

Gold. What is its true price? Since the end of the 18th century until the end of the 20th when the gold standard was suspended, the price of gold had been floating within the range of $25 and $35 per ounce. During the 40 years following the suspension of the gold standard, the price varied between $35 and $1900 per ounce. That is, the price doubled in 200 years but increased 54 times in the last 40 years! Please note, that we do not eat gold, we are simply psychologically attached to it as it has always served as a guarantee for payments and as a protection against inflation. Today governments print money secured by the economy of a country and not by gold, even though anything can happen to the economy. Different estimates show that the fair price for an ounce of gold is between $800 and $1000, taking into account production costs and adding a reasonable profit margin. Depending on the volatility of the speculative sentiment which has risen 5000% over the past 40 years, the market price of gold can vary.

Art. Timeless treasuresā€¦ The most influential index in this sphere is Mei-Moses Fine Art Index and it's been lagging behind the S&P 500 index for the last 25 years. The main disadvantage of investing into art is a wide range of unpredictable fluctuations of price and demand in combination with low liquidity. The famous "Irises" by Van Gogh was sold for $80 T in 1947 and re-sold for $53.9 M 40 years after. At the end of the 20th century prices for objects of art started to warm up and beat new records however, the world recession cooled it down. The objects d'art are unique and their price is a subjective evaluation of beauty and history by a narrow circle of credible connoisseurs. This causes huge price leaps during the economic recession and is not suitable for everyone.

What type of assets are the most secure for saving and multiplying one's wealth? Civilizations and technologies are rapidly developing people's preferences, habits and lifestyle changes. Tape-recorders were substituted by CD-players and MP-3 players in their turn during less than one generation. Nevertheless, today, as well as 500 years ago, the major of their peoples' earnings people are spent on 5 constituents: food, clothes, housing, medicine and education.

Business is the ideal tool to multiply one's wealth. We can create and develop our own business. As it matures, the assets will be diversified from the point of regional and industrial risks. Such diversification can be obtained either by having an international business base or through the acquisition of a company with international presence, thus generating profit from all around the world.

Having a global company in one's portfolio decreases exchange risks as well. After suspending the bond of currencies to gold, every country's money became a usual good on the market. The government of a country strives to develop trust for its currency. The higher the trust for the money the more real assets, deposits and resources one can buy for the paper. The reason that central banks advance money printing tempos over issuing real material values, is due to the fact that in the modern world currencies are overestimated. This causes further inflation and abrupt jumps of exchange rates. If the sales of a company are distributed around the world, the rise in exchange rates of one currency and the fall of another smoothes the business profit fluctuations in whole. Here, the perfect choice is to invest into companies capable of increasing their prices during inflation jumps on the resources market.

As a rule, companies with international presence have a long history and a high stability to competition and economic cycles. Just think how much technology, experience and information on customers Tiffany's business has had by producing jewelry for 170 years? It is more effective than other companies, coming onto the market and then disappearing soon after.

Considering that there are 7 billion people on the planet today and that the population is growing 0.7-1.0% annually while labor productivity grows 1.5-3% per year, the profit base of companies with global presence will continue to grow. Such assets, tested by time and economic cycles, protected against political collapses, interest and exchange rate fluctuation serve as the background for saving and multiplying wealth for the sake of coming generations.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it. The author has no business relationship with any company whose stock is mentioned in this article.

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