I gather that the article is here, but I would not bother reading it because the above summary reveals just how wrong Policy Exchange is and these authors are.
First, savings do not fund investment. The UK has £8,100 billion of financial wealth according to the Office for National Statistics: vastly more cash is available from savings than might ever be needed to fund investment and that investment is not happening because that is not the use now made of savings. They are almost all used for speculative purposes, those saved with the government excepted.
Second, investment is actually almost invariably funded by credit, and that is created out of thin air by banks. Policy Exchange reveals that it does not know how the economy works.
Odd that an accountant seems not to have heard of equity as a component in investing.
Nor, obviously, that net new investment is going to be net new saving, not the current stock of saving? For it that were not true, then where would all the results of the investing of the past be if not in the stock of saving/investment?
I believe the world works like X. The data says the world works like Y not X. Therefore the data is wrong.
Using savings for speculative purposes…
Like funding or buying into something in the hope it will go up in value, Isn’t that investment?
Or is there now a special spud friendly class of “investment” which you buy in the expectation it will decrease in value? Government investments in fact.
Spud to English translation…
Investment The government nicks your money and spaffs it on something that is never going to have a financial return, and will probably also make life worse for most people in the country.
Speculation People make their own investment decisions based on the level of risk they’re willing/able to stomach, the time horizon of that investment and its expected return.
I suspect that “investment” in his mind only refers to government. In which case yes, it would be useless.
What’s the difference between ‘investment’ and ‘speculating’?
Oh, I see other people got there before me.
Surely the difference between investment and speculation is whether something new is created or not? If I use some money to buy some tools and then use those tools to create something that is then sold for a profit, thats investment. Something exists that did not exist before my investment. If I buy shares in an existing business in the hope that they go up, thats speculation, as all thats happened is the names on the bank account and share register have changed.
I/we invest, they speculate
A well known principle
But unless there are potentially people to buy shares in existing businesses, Jim, then initial investments in businesses will never be made. You can’t have what you term investors without further investors (or what you term speculators) via whom a profit can be realised. The later share buyers are as important to the initial breakthrough as the earlier ones.
Zola, in Germinal, got in a sly dig at that sort of anti-speculator rhetoric in his treatment of the tragic figure of Deneulin. He (Deneulin) is sinking his fortune into modernising the pits of his own small seam so they can yield up hitherto inaccessible coal reserves and his attempt to enlist further investment from the timid, indolent, naively grasping M Gregoire draws the horrified response “I won’t speculate, I tell you”. The subtext being that M Gregoire will continue to happily draw his dividends as the aspiring monopoly squeezes out Deneulin.
I buy shares for the dividends, in solid companies. Any capital gain is merely a bonus.
I do not regard that as speculation.
Surely the difference between investment and speculation is whether something new is created or not? If I use some money to buy some tools and then use those tools to create something that is then sold for a profit, thats investment.
And if you can’t afford those tools?
You come to me and say you have this great idea and show me how it will make a profit. I’m convinced that you’re a good guy and the idea looks good. I’m prepared to back you and have 2 options:
1. I take a part share in your business and take a part of the profit. The down side for you is that you’ve had to sell part of your forecast profits, the plus side is that if the business fails you don’t have to pay me back.
Am I a speculator or investor? I’d argue I’m an investor (in you).
2. I lend you the money, the down side is that if your business fails I want to be to be paid back so I want some collateral, your family house will do.
Am I speculator or investor? I’d argue neither, I have no downside but not much upside.
But wait, in your world if I buy a share of your business and you do something stupid and run up lots of debts I’m also liable for those debts and someone could come after my family house. In that case I want complete control of your business and to be able to approve all of your decisions.
So it looks like you’ve closed out one of your options and the only way you can start your business is by putting your family house at risk.
Surely the difference between investment and speculation is whether something new is created or not? If I use some money to buy some tools and then use those tools to create something that is then sold for a profit, thats investment.
Sorry Jim. Whenever I bought tools to create something it was spending. In a sense, speculation. Because one can never be certain one will recover the cost of the tools, let alone make a profit from them. It’s always a gamble.
For my mind “investment” has two qualities. It’s expected to produce an income out of the thing being invested in creating added value in commerce. The principle is expected to be recoverable either by return from the investee or sale of the stake. Thus you can’t invest in your own business. It may be wise spending. But that doesn’t make it investment.
Everything else is just spending, speculative or otherwise.
Oh, by the way. To destroy Spud’s illusions, you can’t invest borrowed money. It’s the lender who’s doing the investing, not you. You are spending. And possibly a crook.
Thus you can’t invest in your own business”
Nonsense. You buy one machine, it turns out widgets, you make profits, and invest them in another machine, make even more profits, and so on and so forth. Yes the buying of any individual machine at the very point of purchase is just ‘a purchase’ as you say, but if you then put that purchase to work making profits then its an investment. You have to look at the thing in the round over a period of time, not just as a snap shot of one part of the process. If I buy a lathe and use it in my garage to make model steam engines for my own amusement then its not an investment. If I buy the same lathe to turn out parts for someone else and make profits then it is an investment.
“You come to me and say you have this great idea and show me how it will make a profit. I’m convinced that you’re a good guy and the idea looks good. I’m prepared to back you and have 2 options:”
If your money being put in results in some new activity happening its an investment. If you are just buying a share in an existing up and running business (and the seller is cashing out) then its a speculation – you’re hoping the business will continue to do what its done before and make your stake worth more/provide an income. But nothing new has been created, all thats happened is a transfer of assets between two people, share buyer and share seller. Society is no better off as a result. Where as if something new has been created, whether a building, a product or a service then society has more ‘stuff’ it can consume, which I assume it the point of it all in the first place, creating more stuff for society to be able to consume.
I found this explanation regarding the distinction between investing and speculating in Corporate bonds.
Investment-grade bonds: These are issued by companies with a higher level of credit quality. They are considered less risky and are more highly rated.
Speculative-grade (or high yield) bonds: These bonds are issued by companies perceived to have a lower credit quality. They carry higher risk compared to investment-grade bonds1.
Essentially speculation is taking more investment risk to hopefully get a better return.
if you then put that purchase to work making profits then its an investment
So you’re saying the word “investment” carries a positive value? That’s the argument Spud uses for public spending. It’s always an “investment”. Including NHS workers’ wage packets.
Investment is just a technical word for a process. It carries no virtue.
If you are just buying a share in an existing up and running business (and the seller is cashing out) then its a speculation – you’re hoping the business will continue to do what its done before and make your stake worth more/provide an income. But nothing new has been created,
Of course something new’s being created. The value the business adds after you bought your stake in it. What it created before you bought in, a portion went to the person you bought it from as dividends. And if you paid more for his share than he put in, he also shared in the overall added value of the enterprise up to that time. You may in future added value
He was an investor. You are now an investor.
You’re argument mirrors Spud’s over stock markets. That “they serve no purpose in raising capital because they’re dealing in capital has already been raised. They’re just speculative.” You’re looking at an end to end process not a thing. The capital might not have been raised if there was no way for the investor to recover it when needed.
Sure, all investments have a speculative element. Because you can never be sure what added value a business might create in the future. The risk factor should be included in the price at what you invest. But it’s assessed by the buyer not the seller.
That’s why I said you can’t invest in your own business. You can’t buy your investment from yourself. The term is spending. It may be wise spending or unwise spending. But it’s still spending.
There’s whole lot of things called investment these days aren’t. Insurance isn’t investment. Although investing in an insurance company might be. But insurance itself is just gambling. Always was, always will be. Both for the insurer & the insured.
“So you’re saying the word “investment” carries a positive value? That’s the argument Spud uses for public spending. It’s always an “investment”. Including NHS workers’ wage packets.
Investment is just a technical word for a process. It carries no virtue.”
Of course paying NHS workers more is not an investment, unless somehow they become more productive as a result. Paying more for the same output is just stupidity, its not even speculation.
My technical description of a process that qualifies something as an investment is the creation of something new. Spending money to build a new house is an investment, society has something extra. Spending money to buy an existing house is not an investment (you can call it whatever you like, if speculation holds negative connotations) because nothing has changed except the names on the deeds and who holds the money. Society is no better off because Mr Smith now has a house and Mr Jones has £250k in his bank account whereas the opposite was true previously. Whereas if Mr Smith builds a new house with his £250k, and Mr Jones still has his house then there’s 2 houses where 1 existed before.
A few years ago I bought a water butt, and a little sleeve to connect it to the down chute from the roof.
Cost: £25. Estimated saving on my water bill at the time: £2 a year
I’d call that an investment, proper micro, even a nano, but still an investment.
Maybe if the water price bounced around like the price of cobalt then it would have been a speculative investment.
It does gall to read investment conflated with spending where there is no effort made to decide if it will make a return, arguments made about the moooltiplier, or if we don’t do it people might die. That’s speculation imv, and it’s easiest done by people not risking their own money, just hoping that they’re right, that banning new Mexican takeaways is an investment in public health. (that’s a dig at sunderland who did this recently). Or that spending on more government nurses will pay for itself.
Jim. Speaking as a one-time & still occasional investment manager, investment is a technical term. So, unless you’re proposing to besiege a castle it’s limited to tight parameters..
But as Bongo says in the second comment, it has to be one of the most misused words in the dictionary. Which he proves in the first part. His water butt is wise spending as a contributor towards his water supply. That doesn’t make it an investment. As the caveat on that enticing savings plan says in the very small print, investment can go down as well as up & one doubt’s he’ll be re- installing his butt above the gutter.
Looking at your technical definitions, a house is a consumer product. Building one produces the product & buying one is spending. Building houses for other people? I did buy & reform & buy & convert rather than new build. So that was a profit making business. As far as the money side, I always regarded it as speculative. Could I complete them within budget & get the desired sale price? Having one half way done when interest rates hit 16% & the bottom fell out of the market shows how speculative. At least I was doing it with my money & not “borrowing to invest”. The tools it was done with were a cost, not an investment.
There’s three reasons to buy something.
1. You use it. This covers things like “hang it on the wall and look at it”.
2. You get an income stream from it.
3. You hope to sell it for more to someone else.
The third one is speculation, especially if there’s no hope of getting an income stream.
My rainwater collection tank is situated so it is above the level of the toilet. I think I remember that toilets take the second largest amount of water after baths, and I’d already been a shower-user for years. So now all my flushing water is rainwater. Comparing with my neighbours it seems my water usage is halved. Plus, it offends me to chuck drinking water straight down the sewer.
@M
In different places I hold both VUAG and VUSA exchange-traded funds. They are the same fund, a cheap Vanguard S&P500 index. The former is an accumulation unit and the latter is an income unit; in effect, VUAG automatically re-invests dividends in itself while the latter pays out dividends.
So, VUSA returns an income stream, so is an investment, but VUAG accumulates capital so is speculation… even though they’re exactly the same thing underneath?!