Friday, January 8, 1999

Ways to Make Money

by Tom Barron

Stocks, bonds, options, covered calls, naked puts, debentures, futures contracts, annuities, REITs. So many investment vehicles. Somebody understands them all, right? I sure don't. Actually, in all the time we've been around, human beings have only come up with three ways of making money. All the vehicles listed above are variations on two of those three ways.

The first way of making money is one pretty much everyone is familiar with. In fact, it's how most folks spend the majority of their waking hours -- at work, trading their time and skill for a wage. There are lots of different forms of wages (just like there are different forms of the other two ways): hourly wages, salaries, commissions, benefits, and stock options. In general, anytime I receive something of value in compensation for my time and/or skill, whether it's money or some valuable asset that can be turned into money, I'm making money.

The second way of making money arose when Ogg the caveman had spent all his clams upgrading his fire to the latest spec and had to talk his buddy Grok into spotting him a few until the next fishing trip. Grok recognized an opportunity when he saw it and invented interest on the spot. Ogg never did figure out why he had to pay back six clams when Grok only loaned him five. But ever since, lending money at interest has been the second way of making money.

The third way of making money is simply to own an appreciating asset (like a piece of land, or an antique vase, or shares of a company). We think about and speak of "making money." It might be more accurate to call it "making value." Some of us are compensated at our jobs in non-monetary ways. Has your boss ever taken you out to lunch? If you have health insurance through your employer, you can't turn that into cash, but it's surely a valuable part of your compensation package.

When we receive interest on a loan, we're just receiving back value for the service of allowing the debtor to use our asset for a while, kind of like loaning my step-son my car -- it better be full of gas when it comes back. It doesn't matter what the asset loaned is or what form the compensating interest value takes, as long as creditor and debtor agree on the terms of the transaction.

And when we generate value for ourselves by navigating the fluctuating exchange rates of different assets, seeking to ride upward on the shoulders of assets with increasing values relative to other assets, it's convenient (but not absolutely necessary) to track the values in terms of money. Money is just another asset with a value relative to all other assets.

Finally, we might observe that no asset, money included, has any particular intrinsic value. The value of an asset is whatever people say it is, whether it's food or money or gold or common stocks or my house and it can only be defined in terms of other assets. Value is just a web of relationships among assets and money is just a convenient means of documenting and tracking those relationships.

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