Q: What should I tell a client who is uncomfortable with speculation and would rather buy and renovate real estate when the yield is over ten percent and sell when it’s under five percent?
A: That is a very good question. It raises many issues, which Rothbard (Man, Economy, and State) and Mises (Human Action) cover in detail. Briefly, true market profit only comes from predicting future market conditions and adapting to them better than your competitors. All the rest is land, rent, and salary. This is the same if your client is self-employed; part or all of the net income from his business activity comes from the value of the services he renders to the business. And, that includes management services. The same analysis applies to investments of cash or other assets to the business enterprise. If your client invests cash, services, or management time, their value needs to be subtracted from revenue generated in order to know the business activity’s real profits. After that’s done, what’s left is the value of entrepreneurial decisions made: the speculation concerning future events. That value may be positive or negative.
Q: But if he buys when he can get ten percent and sells when the return is five percent, he will have a sound and understandable management plan for long-term profit. Have I missed something?
A: Yes. Even a stopped clock tells the right time twice a day. The wait might be very long. Mathematical calculations using a formula cannot be successfully applied to predict economic events. The problem is that all value is subjective. It cannot be measured except with ordinal numbers: first, second, etc. These cannot be added, subtracted, divided, or multiplied. Additionally, we live in an expanding universe, like the balloon filling with air. There are cycles but they do not repeat exactly. See The Epic Story of How a ‘Genius’ Hedge Fund Almost Caused a Global Financial Meltdown.
It is a well-known story in a long history of stories — fairy tales. Human action cannot be reduced to a mathematical formula; the fact is that man is soul and spirit as well as flesh and bone. What you can depend on is that economic laws, applicable without exception, exist just like the law of gravity. Your starting point for understanding this is Mises’ Human Action and Rothbard’s Man, Economy, and State. For its application, read The Art of Speculation during Civil War — Sun Tzu Meets Jesse Livermore, with further details coming in my next book. There are three levels of knowing: mental, emotional, and physical. Your understanding needs to be at the level of physical action; then you can expect results to be proud of. You won’t learn that sitting in a classroom at Harvard.
by Arthur Fixed
[box type=”info” style=”rounded” border=”full”]Commentary from Arthur Fixed the author of the Art of Speculation during Civil War – Sun Tzu Meets Jesse Livermore is a private manuscript copyrighted 2012 by Art Fixed.[/box]
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