Capital, Not Money

To reach the long run, investors must transform their mindset — Investment dollars must be viewed as capital, not currency — Capital is a resource, not money to spend.

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CAPITAL, NOT MONEY

Successful long-term investors hold their investments so long that the investment becomes “capital.” This capital is not money to be spent, but a permanent holding. It is truly excess, never needed for life’s expenses, and survives to the long run.

Only truly excess capital, money that can weather the worst economic storms, can be committed to the long run. For most investors, this money is scarce.

Short And Long-Term Investing

Investors are faced with two different paradigms to invest under. For those investors with capital, even a small amount, suitable long-term, multi-generational investments can be considered. For others, investing money that may be required for known expense, a short-term investment must be accepted.

Investors should be honest with themselves and face this challenge. The purpose of short-term investments is simple: ensure dollars are available when required (to buy a house, pay for tuition, etc.), and, if possible, to earn income to support these purchases.

Short-term investments may not be suitable for equity investing. These funds should be liquid, as accessibility is far more important than return. But as an individual’s savings grow, there is an opportunity to convert some of this money into capital.

Capital The Resource

Capital is a resource for generating wealth. For money to be considered capital, it must be completely unneeded. Capital is not a currency and will never be used to purchase goods. Capital is just capital.

Individuals in the fortunate position of having surplus money have the option to either enhance their lifestyle or create capital. It requires discipline to convert money into capital as the opportunity cost is crystal clear: money can be spent selfishly on vacations, cars, and clothes; money can be spent admirably on a child’s schooling, parent’s healthcare, or philanthropic ventures; or, money can be set aside, forever, and converted to capital.

Capital is the true resource of the wealthy. Once an individual has capital, doors open for wealth creation. Capital can be used to hold onto a home as a rental property instead of liquidating to support a move. Capital can help a friend grow their business, creating the opportunity to share in the value created by a trusted partner. Capital allows an individual to be patient with their investments during difficult market events.

Collecting Capital

At Berkshire Hathaway shareholder meetings, attendees view their shares as capital. Many have held shares for decades or longer. Notably, because Berkshire does not pay a dividend, this capital provides no immediate return. The capital does not enhance the holders’ daily lifestyle, but instead preserves and grows wealth.

Berkshire Hathaway shares are a collector’s item. Creating a personal collection of shares, of not only Berkshire but other worthy businesses, is a hobby that, as a side effect, generates wealth. Committing to collect shares supports an individual in his or her selfless decision to convert money to capital.

Berkshire Hathaway collectors value lengthy hold periods. Shareholder meeting attendees do not openly admit to the number of shares they hold, but are always willing to divulge the length of time they have been invested. Importantly, it is never too late to start building one’s collection and hold period.

Coin Collecting

Bitcoin holders share the same diamond-handed zeal of collecting and holding as do Berkshire Hathaway owners. Both Berkshire and Bitcoin have generated excellent returns for their investors, but only for those committed to hold for the long run. While Bitcoin and Berkshire have little else in common, this shared cultural attribute sheds light onto the power of capital and the ability to hold.

Unlike Berkshire shares, Bitcoin can literally be used to make purchases. Any Bitcoin investor has the opportunity to instantaneously convert their capital back into dollars or goods. Yet most continue to treat their Bitcoin as a wealth generating device as opposed to digital currency.

Clear Eyed Goals

In our last piece, we highlighted the difficulty in holding long-term investments. Acknowledging the limitations investors face and the difficulty of reaching the long run allows for a more nuanced view of investment allocation.

The ability to reach the long run requires that money be converted to capital. When money is converted into a capital resource, investments can be collected and stored away. Occasionally these investments can be shown off, but, like most collections, they are primarily held.

The road to generational wealth begins with creating capital, in any amount, and beginning a collection.