Investing in Babylon: What we ought to do

Personal Finance
by David L. Bahnsen

Posted on Tuesday, October 20, 2015, at 2:58 pm

We established in the first column of this three-part series that we know investing is the pursuit of a return on capital—some premium return above the actual capital invested—in the context of the acceptance of some risk.

In the second column, we recognized that we do not know exactly how things will play out, if our best inclinations are privy to all the facts, and whether or not a given outcome can ever be assured. My advice was that one’s investment process should start with a carefully defined understanding of risks—all risks—and the set-up of appropriate limits, governors, and controls.

We close out the series with the simple list of three principles below, which capture the essence of investing in the modern era for a biblically aware person of means. Knowing investing involves risk in pursuit of a profit is one thing, and accepting that there are risks we cannot fully see or understand is another, but getting ready to do something about investing is the task at hand.

  1. Very little in modern times, including our jobs and other income sources, exists without someone’s ingenuity, innovation, risk, and aspiration. Free markets have created incredible human flourishing. As believers, we have the added benefit of knowing that this is true because God created it to be true. He made man to work and co-create with Him to achieve these things. Growth comes when profits are realized. Profits come from the delivery of a product or service to a market that wants it enough to pay for it. As investors, we’re able to participate in this great truism today more than we ever have. Modern financial sophistication has given us incredible capital markets where even the smallest investors can participate in the pursuit of profits in a marketplace. Devices such as dividends give investors incredibly practical rewards for their investments. Liquidity and divisibility are greater than they have ever been. It is only one vehicle, and it surely must be defined by the aforementioned risk parameters one puts into place, but an investor who loves free markets can actually invest in free markets.
  2. Human behaviors are fallible and subject to great excesses, and these realities of behavioral finance can be troubling for us if we’re not careful. Bubbles can form in certain asset classes—especially in a day and age of fiat money and flaky standards for setting prices around money (interest rates). Likewise, panics can set in that distort real value and actual investment opportunity. One should never lose sight of the susceptibility of human beings to behavioral mistakes, particularly when these mistakes can have an impact on our investment results.
  3. Investing and playing the stock market are not synonymous. One may see great utility in the stock market toward their investing goals, but cash markets, commodities, private equity, small business, alternative investments, international markets, real estate, and any number of other opportunities may fit into one’s objectives. Prudent reserves are one thing, but the pursuit of risk premium is the aim of investing, and in that pursuit there is more than one way to skin a cat.

Too much money has been lost, and, quite frankly, too much money has been “not made” by flawed thinking from well-meaning believers when it comes to investing. When one’s worldview recognizes who is God and who is not, what the aim of investing is, and that we are not to be slaves to fear, a few building blocks are in order to begin investing.

David L. Bahnsen

David is the chief investment officer of The Bahnsen Group of HighTower Advisors in Newport Beach, Calif.

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