• Some people may think of investment as simply a transaction with money. But, more broadly and more fundamentally, it is the sacrificing of real things today in order to have more real things in the future.

• For society as a whole, investment is more likely to take the form of foregoing the production of some consumer goods today so that the labor and capital that would have been used to produce those consumer goods will be used instead to produce machinery and factories that will cause future production to be greater than it would be otherwise.

• The accompanying financial transactions may be what the attention of individual investors are focused on but here, as elsewhere, for society as a whole money is just an artificial device to facilitate real things that constitute real wealth.

• The repaying of investments is not a matter of morality, but of economics.

• If the return on the investment is not enough to make it worthwhile, fewer people will make that particular investment in the future, and future consumers will therefore be denied the use of the goods and services that would otherwise have been produced.

• No one is under any obligation to make all investments pay off, but how many need to pay off, and to what extent, is determined by how many consumers value the benefits of other people’s investments, and to what extent.

• Where the consumers do not value what is being produced, the investment should not pay off.

• The principles of investment are involved in activities that do not pass through the marketplace, and are not normally thought of as economic.

• Explaining yourself to others can be a time-consuming, and even unpleasant activity but it is engaged in as an investment to prevent greater unhappiness in the future from avoidable misunderstandings.

Kinds of Investments:

Human Capital:

• While human capital can take many forms, there is a tendency of some to equate it with formal education.

• However, not only may many other valuable forms of human capital be overlooked this way, the value of formal schooling may be exaggerated and its counterproductive consequences in some cases not understood.

• From an economic standpoint, some education has great value, some has no value and some can even have a negative value.

• Depending on what they have studied, the newly educated may have higher levels of expectations than they have higher levels of ability to create the wealth from which their expectations can be met.

Financial Investments:

• When millions of people invest money, what they are doing more fundamentally is foregoing the use of current goods and services, which they have the money to buy, in hopes that they will receive back more money in the future—which is to say, that they may be able to receive a larger quantity of goods and services in the future.

• Money totals give us some idea of the magnitude of investments but the investments themselves are ultimately additions to the real capital of the country, whether physical capital or human capital.

• Investments may be made directly by individuals who buy corporate stock, for example, supplying corporations with money now in exchange for a share of the additional future value that these corporations are expected to add by using the money productively.

• The staggering sums of money owned by various investment institutions are often a result of aggregating individually modest sums of money from millions of people, such as stockholders in giant corporations, depositors in savings banks or workers who pay modest but regular amounts into pension funds.

• Financial institutions allow vast numbers of individuals who cannot possibly all know each other personally to nevertheless use one another’s money by going through some intermediary institution which assumes the responsibility of assessing risks, taking precautions to reduce those risks, and making transfers through loans to individuals or institutions, or by making investments in businesses, real estate or other ventures.

• Many unthinking people in many countries and many periods of history have regarded financial activities as not “really” contributing anything to the economy, and have regarded the people who engage in such financial activities as mere parasites.

Return on Investment:

• Delayed rewards for costs incurred earlier are a return on investment, whether these rewards take the form of dividends paid on corporate stock or increases in incomes resulting from having gone to college or medical school.

• From the standpoint of society as a whole, each generation that makes this investment in its offspring is repaying the investment that was made by the previous generation in raising those who are parents today.

• Although making investments and receiving the delayed return on those investments takes many forms and has been going on all over the world throughout the history of the human race, misunderstandings of this process have also been long standing and widespread.

• During the particular year when dividends finally begin to be paid, investors may not have contributed anything, but this does not mean that the reward they receive is “unearned,” simply because it was not earned by an investment made during that particular year.

• Risks are invisible, even when they are present risks, and the past risks surrounding the initial creation of the business are readily forgotten by observers who see only a successful enterprise after the fact.

• Misconceptions about money-lending often take the form of laws attempting to help borrowers by giving them more leeway in repaying loans, but anything that makes it difficult to collect a debt when it is due makes it less likely that loans will be made in the first place, or will be made at the lower interest rates that would prevail in the absence of such debtor-protection policies by governments.

• When interest rates are low, it is more profitable to borrow money to invest in building houses or modernizing a factory or launching other economic ventures, but also reduce the incentives to save.

Key terms

• Return on Investments = Profit / Investment

• Investment Allocation: The interest rate is the price of borrowing and effects allocation:

• Low-Interest Rates: More borrowing occurs as it is more profitable to invest.

• High-Interest Rates: Less borrowing occurs as it is costly, causing more saving.

• Speculation: the investment of scarce resources or knowledge with the hope of substantial gain but with the risk of significant loss

• Inventory: goods available for sale held by a company; substitute for knowledge

• Small Inventory: Running out of goods, which causes customers to go elsewhere.

• Large Inventory: Having excess goods, which raises costs compared to rivals.

• Present Value: the price of money today is worth more than the same in the future.

Speculation:

• Most market transactions involve buying things that exist, based on whatever value they have to the buyer and whatever price is charged by the seller.

• Speculation as an economic activity may be engaged in by people in all walks of life but there are also professional speculators for whom this is their whole career.

• It is often misunderstood as being the same as gambling, when in fact it is the opposite of gambling.