Friday, January 26, 2024

Escape Velocity

Escape Velocity

"Escape velocity is the speed that an object needs to be traveling to break free of a planet or moon's gravity well and leave it without further propulsion." - Northwestern University
As financial farmers striving to build, grow, and ultimately subsist off of our portfolio it behooves us to understand this aerodynamic concept.

As we have discussed many times, the greatest threats to the investor are taxation and inflation. Generally speaking, a financial metric like the S&P 500 will continue to increase in value over time because it is composed of survivors; ie only companies who remain prosperous remain in the index, while losers are dropped or go bankrupt. But even the S&P 500 fights a tough battle against inflation. 

The question investors need to ask themselves is whether real growth is occurring are we simply seeing an increase in prices? Inflation often disguises itself as growth. A superb example is M2, or money supply. Does increasing the supply of money increase its true value? Not if it isn't backed by productivity gains.

Knowing that every dollar is worth less tomorrow than today due to inflation, an investor should seek to capture the value of that dollar sooner rather than later. Over the past 5 years the 3 assets classes which have been able to do that are gold, real estate, and stocks (S&P 500 as the preferred benchmark.)

For the worker who has been saving cash the past 5 years it has been brutal. And for those who have been steadily socking it away for decades even worse. The traditional saver has been inflated out of a good portion of their buying power, some 50% in the past 3 years alone!

In the example above, a spaceship needs enough velocity to escape a planet's gravity well. Velocity in our situation are resources, whether gold, real estate, or stocks. Assets that not only hold their value, but perhaps offer growth potential as well. The "gravity well" can be considered that suffocating burden of taxation and inflation which erodes true value and stifles growth.

The reason we Invest Like A Farmer is to achieve sustained growth over time. That rarely happens by chance. An investor needs to understand the value of their paper money and how best to deploy it quickly as fiat currency apparently has a half life in the current environment of about 3 years.