Well you should thank such people for their consumption, where do you think that money’s going? Makes it a little easier for you to profit from your investments. If everyone’s saving everything that’s deflation and not healthy for the economy
We had this argument with @1000000CHF. So I have to disagree with you here. Let’s imagine Susanna’s friend has two ways of spending her money:
- Consumption: pay worker X for haircuts & massages
- Investment: pay worker X to contribute to development of better battery technology
Which of this two you think will push the World forward? Consumption is just a waste of resources (oil, water, human work).
I am NOT denigrating her, she’s one of my best friends and a very talented person. My remark was meant as a neutral observation at how even people who deal with money professionally can end up with few savings. We used to have have “soft” discussions about money even long before I had ever heard of a budget or thought about financial planning even in the most rudimentary fashion. She always seemed to think it was only possible to live a very expensive lifestyle and always wanted the best for her children. I’ll admit secretly envying her at times (went shopping with her once, almost fainted at the prices). Now, 15 years down the road, I see things differently.
Little bit offtopic but… I dont think you are right with point 2. For example investing in stock market: Mostly you just buy shares of someone who sell them to you. So the underlying company wont get a cent of your investment. This would be only tje case if the company isssues new shares and you buy them. Second, the company you are willing to invest is only worth investing when people will buy their products / services, otherwise the company is not profitable which leads to bad stock performance.
Thank you for your comment! Made me think.
Based on your example, it really feels like the passive investor does not make a direct impact. But you will agree, that an active investor surely makes a difference, right?
For example, instead of buying a cheap gas car, you postpone your consumption and invest in a company developing a modern electric car. After some years, the technology is there, and you can purchase a shiny new electric car with your returns.
So, when a passive investor makes a purchase, he will buy from an active investor (at least partially). Then the active investor can use this money to invest into businesses which have the biggest potential. So, indirectly, a passive investor also makes a difference.
True, but consumers aren’t the only customers. If the whole economy shifts from consumer mode into R&D mode, then all this R&D also needs resources. So, many “useless” businesses, which only produce non-essential consumer products, go bankrupt, but the ones that provide tools to further develop technology really start to flourish (like maybe schools & teachers).
Just to clear confusion: it is not a matter of active vs passive investor. it is a matter of markets!
Indeed, when a company goes public, it does so through what is called the primary market. During the IPO, the investor’s money goes directly to the company. But it happens only once (or maybe when the company needs money again and manage to raise more funds).
But where most of the trading happens is on the secondary market : there the first investors sells back his shares he bought during the IPO to other investors - who will, again, sell it at some points to other ones and so on…
So the mechanism of how a passive investor could have an impact on the market would be:
- the active investor lends capital to a promising startup in an IPO, or even before, through venture capital
- business is a success, but it matures, so at some point he decides to sell it on the secondary market
- the buyer is, incidentally, the passive investor, who just buys everything
- the active investor uses his profits, his freed up cash, to invest in another promising startup
it could be the case, but I think it is even simpler than that. Even if the investor on the secondary market does not gives his money directly to the company, he has an important role. Let’s see why by looking at the incentives of every stakeholder:
1 - the company wants to have an easy access to capital when needed, and debt may be expensive
2 - the shareholder is willing to spend his money (in primary or secondary market) only if he is somehow convinced that he will get a return on his equity.
A good return on equity is only possible if the company put the capital raised to good use. Therefore, the investor on the secondary market keeps the company accountable for the use of the capital. if the company screws up, it will be unable to raise capital again. That’s why sometimes you can hear the expression “cost of capital” => you have the implicit obligation to produce a fair return to your shareholders…