Why Investing in Things Producing Things Produces Financial Freedom
Years ago a co-worker casually mentioned to me the only reason she showed up for work was that all her friends were there. I asked, “So what happens when you retire?” It caused some nervous laughter and then we went about our day.
Just a few weeks later the company let her go. Don’t think after putting in 20-plus years you’re not disposable. She emailed me a month later asking if I knew of any open positions in our field. You could sense she was desperate for money.
This causes you to pause and think, “What kind of life is this?” Taking orders from people taking orders, dealing with office politics, worrying about getting laid off or fired. And then begging someone to please hire you one more time.
Plus, there’s mountains of evidence that many workers find their jobs completely meaningless and unfulfilling. At some point you might realize there’s no amount of money that changes the fact you’re wasting your time.
Could the answer be as simple as what Benjamin Franklin once said: “Remember that money is of a prolific generating nature. Money can beget money, and it’s offspring can beget more.”
Instead of endlessly working for money you can have your money work for you. Well, that’s what investing is. While it can mean many different things what it always means is owning assets. Things producing things.
A rental house isn’t a pile of bricks with a roof, it’s a monthly check. A share of stock isn’t a lottery ticket, it’s part ownership of a company.
What doesn’t produce things? Think cryptocurrency or gold. You’re just hoping someone else pays a higher price, and that person hopes the same thing. The key difference is speculating about price is likely to ruin you, while investing in things producing things, like real estate and stock, is a well-worn path to financial freedom.
1. Things Producing Things: Real Estate
Investors buy apartment buildings or farms or single family homes for the cash flow. If you’re not buying the asset outright most of that cash pays for the mortgage, property taxes, maintenance and repairs. But eventually it generates steady monthly income.
In 2012, after the U.S. housing bubble and Great Recession, 30-year mortgage rates were hovering around 3%. It was a fantastic time to buy real estate at distressed prices, financing it at very low rates. A leveraged way of owning a cheap productive asset.
And as long as there are tenants the money shows up in your bank account each month like clockwork. Which reminds me of a story about a guy who owns a 70-unit trailer park and 200-unit storage facility.
When times are bad people are looking for cheaper places to live and store their stuff, and when times are good, well, there’s always someone that’s not doing so good. In other words, real estate can work as a hedge against downturns while at the same time a hedge against inflation because rent prices rise over time.
2. Things Producing Things: Stocks
The reason investors want to own stock is because over long periods of time it appreciates more than real estate. For instance, using Robert Shiller’s data, over the past 30 years real estate returned about 1% while the S&P 500 returned 6%.
What that means is if you’re going to buy an asset compounding for 30 years at 1% versus 6% the difference there is 5% and what 5% does to the results over long periods of time like 30 years is pretty eye-opening.
Here’s the math. A $100,000 piece of real estate compounding at 1% will be worth $135,000 in 30 years while a similar stock investment at 6% will be worth $575,000. That’s a difference of $440,000 and why people want to own stock.
Of course, on average the market falls 10% once a year, about 20% every four or five years, about 30% every decade, and 50% a few times during a lifetime. Market volatility makes holding stock more difficult than real estate but it’s the price investors pay for superior long-term returns.
Things Producing Things Produces Financial Freedom
Real estate provides steady, inflation-adjusted income, and there aren’t minute-to-minute market valuations which cause investors to panic and sell. Stocks, being sensitive to every miniscule macroeconomic event, have short-term volatility but provide long-term reward.
Warren Buffett quipped, “If you don’t find a way to make money while you sleep, you will work.” The point is that it doesn’t matter how you have your money working for you because a dollar from a rent check is the same as a dollar from a stock. What matters is investing in things producing things.
This was originally posted on Forbes in March 2019. Re-posting it here for a permanent archive.