Everything with money is either an investment or the sacrifice of one. This seems simple enough, but the more you think about it, the more shocking is it’s impact.
What It Means For Business
In short, all any business is about is creating positive returns on shareholder equity that are greater than the combined impact of inflation and taxes.
Whether publicly traded or not, any business that fails to do this is going to erode shareholder confidence — even in small business — and encourage the owners to invest their money elsewhere. “Sustainable business”, 1%FTP and all the feel-good karma can’t escape the fact that if companies like Massive Mouse and Patagonia don’t perform, then:
- I would rather start a donut shop; and
- Even Yvon Chouinard would rather start a donut shop… because no amount of karma is gonna pay for those fishing trips.
Also relevant is that any gain, regardless of size, operates by the same principle whether in 10s of dollars or 10s of billions. What makes larger numbers more exciting is their relationship to our individual cost of living. And the only way to get to larger numbers is to have the smaller numbers perform until they’re large. If “I only made X%” repeatedly results in those gains being spent on coffee and ice cream, then the compounding — that could make a small number a big one — is lost. The opportunity costs of that coffee and ice cream — and especially of that new car — are huge.
In addition to positive returns on shareholder equity, the goal of business, work and investment is the same: to create livable cash flow. Jobs are interim solutions for small portfolios that cannot grow themselves and support their beneficiary at the same time. Jobs create livable cash flow for the beneficiary and hopefully also accelerate the portfolio’s growth through additional investment. Once the portfolio is big enough to both grow itself and maintain it’s beneficiary… well then, we can get some serious, personally-important shit done. (Some people may say “retire” but I’d rather French kiss a shotgun than do what most people mean by retire — i.e. kill time until we die. “Financial independence” is a much more palatable term.)
The Opportunity Cost
So, in mathematical terms, how important is it to save, invest and pinch pennies? What is the opportunity cost of every dollar we spend today?
If we spend a dollar today, then how many future dollars are we spending if we assume that the other option is to put that dollar into an S&P 500 Index and it would perform as it has historically? To make it easier (perhaps more painful), what was the opportunity cost of every dollar we spent in 2002 over the following five years?
If invested in an S&P 500 Index fund, $1 at the end of 2002 would have been worth:
1) $1.29 at the end of 2003 (28.7% annual growth rate);
2) $1.43 at the end of 2004 (10.9% compound annual growth rate)
3) $1.50 at the end of 2005 (4.9% CAGR)
4) $1.74 at the end of 2006 (15.8% CAGR)
5) $1.83 at the end of 2007 (5.5% CAGR)
So every dollar we spent in 2002 was the equivalent of spending $1.83 of our 2007 dollars. (Bull years for the market to be sure, but the principle is the same regardless of the degree of gain.) Suddenly the dollars at the shopping mall and the coffee shop take on a whole new value…
