Why Money Is Like Soap

One of my favourite quotes comes from economist Gene Fama, Jnr. He says…

“Money is like soap, the more you touch it the less you have”.

Three weeks ago I wrote a Moowsletter called Surviving the Mother of All Stock Market Corrections. In summary, it spoke about the benefit of investing in a core stock portfolio and sitting still.

A week later I followed up with the Father of All Retirement Mistakes. The general thesis of that post was to look after the goose (lump sum) and live off the golden eggs (income).

In other words, look after your capital and don’t fiddle with it. Don’t poke or pluck the goose.

The Myth
If you listen to a lot of market commentators, fund managers and property spruikers they talk about the need to move your ‘money around’. Buy this, sell that. The implication is you will outperform the market. The problem is you usually don’t. Instead you just create a lot of ‘friction’ (buy/sell costs) plus capital gains taxes.

It occurs everywhere.

Stock market – strategists often talk about emerging trends and market changes, the need to move out of one sector and into another. There always seems to be something to chase. The truth is you just need to sit still with a well diversified portfolio and make the occasional adjustment.

It’s the very reason I don’t like managed funds. Some of them have churn rates exceeding 100% pa and fail to make good money. Any gains get sucked up in costs and taxes.

Property market – sometimes you might hear about ‘money migration’. E.g. sell in Perth and buy in Sydney and when Sydney has finished its run, buy in Qld, or wherever the next property ‘hot spot’ is.

The property spruikers love this stuff. They talk it up while you peddle like crazy to keep up, usually at great cost.

That’s why I believe you need to go through two property cycles (15-20 years) if you use a negative gearing strategy to buy property. The first cycle is required to reach break-even and the second cycle is for profit, assuming you have bought in a high growth area.

Superannuation – many superannuants move their money in and out of the market at the drop of a hat. It becomes a fruitless task. More friction, less soap.

Baby boomers – they go through a similar cycle with sea changes and tree changes. They assume they will get the best possible price when they sell and the lowest possible price when they buy again. What’s left over is often disappointing.

Home owners – a similar problem is currently unfolding for homeowners who have sold their home in the Sydney market hoping to get rid of their mortgage and buy back in at a lower price. Sadly they have learnt the hard way. You need to buy and sell in the same market…which usually involves another mortgage.

The Messy Middle
Central to the ‘money and soap’ analogy is emotion. It’s very difficult for investors and home owners to make rational decisions in the absence of emotion. If they could, less emotion would mean less motion. The soap would last longer.

Not convinced? Consider this juxtaposition.

The Magic
How often do you hear about someone who bought their home 40 years ago for $50,000 and now it’s worth close to a million dollars. There’s one reason for this. They sat still with their backside firmly planted in the couch.

I am not saying you shouldn’t do anything. I just think activity is the wrong yard stick for investing. Activity is input focused, productivity is output focused.

But most important of all is this. Regardless of what Gene Fama Jnr says, use all the soap you like…be economical with something else!

Have a great week!