Despite the title, no, this post isn’t about how to find commitment with your significant other. I’m talking about financial, not emotional investment, and I’m talking about the romance of believing things into existence, not your love life.
To invest wisely, I think one needs to have a reasonable belief that investing those resources will result in something new and valuable. If you invest money in building a dairy farm, hopefully you believe that the money will help build a barn with cows that produce milk twice a day. A successful investment means that the barn really does get built and the milk gets produced.
When that happens, the result is wealth, which is to say: the investment creates an ongoing supply of milk where there was none before. Note that this wealth isn’t in the form of money. The result of the investment is milk, and the purpose of making the investment was to build a dairy farm, not to create a financial return. If a financial return is desired, the farm can be sold to convert it back into money, but doing so destroys the investment, yielding a profit (or a loss), but no milk and therefore no wealth.
There’s another way to get money from the investment: the milk can be sold. This leaves the wealth intact: The farm still exists, and milk will continue to be produced. But it takes a whole lot of milk to recoup the original investment. If the goal is financial return, it’s usually a lot quicker to simply sell the whole farm when the price has gone up.
These two approaches reflect two common strategies for recouping an investment. Selling the farm is speculation: Buying and selling with the goal of selling for more than the purchase price. Selling the milk is taking a dividend: Selling the product, but keeping the means to create that product intact with the expectation of having more to sell in the future.
They also reflect contrasting metaphors that I use in The Hands that Feed Us: Romance vs. finance. Romance is achieving a dream of having milk by building a farm. It is about creating something new and valuable. Finance is making sure the farm gets sold for more than it cost to build it. It is about capturing value that already exists.
To take a further step: An investment starts with buying in. Investing romantically means buying things that create wealth in hopes of harvesting that value as a dividend. It means building the farm and selling the milk. Investing financially means buying valuable things cheaply in hopes of capturing that value as profit. It means buying the farm as it already exists, and then reselling it at a higher price. The difference between the two approaches is that selling milk sells the surplus value that is created, while selling the whole farm divests that value entirely for the sake of turning it into money. It’s the difference between creating wealth and spending it. If you want to build wealth, you need to create a situation that produces it. If you want to spend wealth, you just need money.
This difference between investing romantically and investing financially doesn’t seem to be popularly recognized. The image of an investor is of someone who buys low and sells high (finance), not of someone who buys in and receives dividends (romance). In popular imagination, romance belongs to entrepreneurs, not to investors, and I think this is a problem.
The problem is this: Investment is critically important to our collective wealth as a country. Investment is — or should be — one of the primary ways that wealth gets passed on to the next generation, and it’s the basis of class mobility, allowing a transfer of wealth from the wealthy to the skilled and ambitious. It’s how our economy renews itself. But the only romantic investment creates that kind of transfer. A financially-oriented investment is primarily concerned with capturing the value of the investment, not with creating value in the first place.
Our culture is confused because we use the same word to describe two opposite senses of how wealth can be used. We talk about investing in roads or buildings or businesses because those things create value — and wealth for both investors and for society at large. But when we talk about investing our money, we talk to investment managers whose job is to “protect” our money and ensure that it earns an acceptable return. Whether or not anything of value is created to create that return is at best incidental. The conversation is not “I want to invest in a dairy farm”; it is “What can I invest in that will return more money than I’m putting in?”
Our economy relies on romantic investment, but to support that economy, we’ve built a financial sector that measures success almost exclusively in terms of financial return. instead of using our money to create wealth, we are spending our wealth to create money, and we have institutionalized this attitude in our financial industry.
The irony of all this is that the financial returns of investing romantically are better than from investing financially. Owning a farm that produces milk on an ongoing basis produces more money than selling the farm once at a profit. This isn’t true for every farm and every investment, but it is true on average. There will be outliers where a farm is sold for so much that it will take many, many (too many) years to recoup the sale price from selling milk, and there will be outliers where a farm will be forced to stop producing milk before the investment is recouped. But, on average, selling the milk will out-earn selling the farm because a romantic investment creates value on an ongoing basis, whereas a speculative investment doesn’t create value — profit that comes from speculation ultimately comes out of another investor’s pocket, not from believing that something new can be created.
Put another way, speculative profit rides on the back of the buyer: Ultimately the buyer has to believe that buying the farm at the price they are paying will let them create something new and valuable. If they don’t intend to build something new, then they have to believe they can sell it to someone who will, but eventually someone has to build the farm. If nobody does, the bubble pops and the final investor loses money. The only way value gets created is if there is a romantic investor at the end of the chain who is willing to build the farm.
I wrote this article — and I made my film — because I want to convince you of a somewhat implausible thesis: its more profitable to invest in romance than in finance. I’ve found it incredibly difficult to articulate why this thesis is true, but it’s what I learned from observing how the five farmers in my film successfully managed to build their farms. What they had in common was the belief that they could create something new. They had a romantic vision of what their farm could be, and the determination to make that vision real.
I joked at the start that investing romantically isn’t about your love life, but the parallel with procreation isn’t entirely accidental. Romance often does lead to babies when a couple believes in the creation of a new family. I think that’s what investment means: To put resources into creating something new, whether that is a family or a business. Nobody starts a family for profit, and, while it’s not a bad idea to put some thought into how you are going to pay for your children before you have them, the thing that makes a family successful is desire to be a family, not for any instrumental benefits of having children.