Sunday, October 6, 2013
What do you own?
Possession is nine tenths of the law.
A stock is a certificate of ownership. But what do you own? A part of a company? Not really. You own an electronic entry stating you own a share of stock. So what's that? Well, it is what it can be redeemed for. For example a piece of paper stating you own a share in a company. Or pieces of paper with notional values written on them: dollars. You own paper. Redeemable for more paper.
The company itself is owned by its Directors who can extract value, sell off pieces, trade products for other products, have offices on the real estate, lease cars, etc. They have something real.
You own paper. If you demand part of the company, those who really own it will laugh at you. Come take it, they will say. Ha ha ha. Possession is nine tenths of the law.
A bond is an IOU. A loan. What do you own? A piece of paper stating you have a right to some sort of Dividend or income stream. It can be redeemed for dollars. Maybe. It is worth something as long as those who pledge to pay you, do. If they stop, it is worthless. You can say: "Hey, give me my dollars." They will say "Sorry, come take them if you can. Ha ha ha."
A bank account is a loan. You are loaning money to a bank. What do you own? A pledge that they will return your money on demand. If they can. For that they give you some interest. Some income. Very very little. In a crisis banks can be shuttered. Or bank accounts can be confiscated. They call that a "Bail in." Then what do you own? An electronic entry stating your loan (bank account) is at the bank. You can print that out on paper if you want.
Then you own paper.
All these instruments of value work as long as everyone trusts everyone else. The moment trust is compromised they can stop working. And then you own worthless paper.
Trust is a very tenuous notion. Do you trust your government? Do you trust your bank? Do you trust your broker?
The other type of asset is a hard asset. You keep that in a vault somewhere close to you. Somewhere you have immediate access. Then what do you own? You own the coin, the painting, the diamond, the book, the statue, the document. You own exactly what you own. It is real. In a crisis, you need trust only that you have the strength to protect your hard asset from thieves.
You should own hard assets in direct proportion to your level of trust in your institutions.