What To Put into Your Basket: Long- and Short-Term Investments

By Michael Greaney

Possibly the single most important rule of investing for any purpose is to stay away from things you know nothing about. As Peter Lynch observed in his investment manual, One Up on Wall Street, don’t invest in anything unless you’ve done your homework first—and be prepared to do plenty of it. The second rule is, don’t invest in anything you can’t control in any meaningful fashion.

Ordinarily, these rules dictate staying close to home and investing in your own business, since that is generally where you have the most control and thus can obtain the best information. Currently, the most widespread method of investing in your own business is through a sole proprietorship. For those who work in a corporation, the Employee Stock Ownership Plan (ESOP) has some advantages, although such an arrangement is what the law calls “beneficial ownership,” and does not generally convey any direct control over the investment, or even in many cases how much is invested. IRAs and 401(k)s also have certain advantages with respect to security, as well as substantial drawbacks when the issue is control.

Current economic and legal institutions, then, virtually mandate investment in publicly offered stocks and bonds in order to reach some degree of control over your assets and to reach your investment goals. There is also the issue that, having reached a level of “capital self-sufficiency” by following Andrew Carnegie’s advice of putting all your eggs in one basket and watching that basket very carefully, you will follow the prudent rule of taking whatever eggs may be overflowing and diversifying them to spread out your investment risk. For both of these goals, domestic and foreign exchanges offer a number of advantages as well as some serious drawbacks.

In almost all investments on the secondary market (as transactions on stock exchanges are called), minority shareholders have virtually no power, and thus, practically speaking, no meaningful control. For this reason, it is vitally important to keep a close watch on those economic and political factors that do have the power to have a significant impact on secondary markets for stocks and bonds.

If your goal is short-term investment for immediate gain, the current political and economic situation in the United States represents a unique opportunity to buy low with the expectation that, as they always have in the past, matters will improve immediately after the upcoming elections. Those with the liquidity to invest now have the possibility of seeing substantial gains in the short term.

If your goal is retirement or any other long-term objective, the foreign markets offer the opportunity to take advantage of rapid economic growth, particularly in Asia, and most particularly in China. Europe, while temporarily doing better than the United States, is tied too closely to the U.S. economy, and will eventually begin to decline unless serious steps at reform are taken. In addition, due to the decline in the dollar, European stocks are overpriced relative to those in the United States. While Asian stocks are also overpriced, they have the growth potential to offset the decline in the dollar, which Europe does not have.

Unless the United States soon adopts an economic and tax reform package along the lines suggested in Norman G. Kurland’s book Capital Homesteading for Every Citizen, there will be a continual decline in both the dollar and the domestic stock market, making the long-term investment potential more risky, and enhancing that of the Asian markets.