Fiction and Myth in Finance

Is investment, as we've traditionally practiced it, based on solid economic and business evidence demonstrating our investment has generated enough productivity to make our expected returns affordable?

So we've had the Greek debt crisis. We've had the meltdown of 2007 -2008. We've had the Eurozone debt crisis and it's still on. We've had a series of debt and credit crises it seems ever since we've had debt and credit.

I heard an interesting commentator yesterday talking about what wealth management strategies to expect as over the next months as the Greek situation settles itself out one way or another.

The thought is that investors will move from equity to debt securities as debt securities stabilize with new attractive rates.

So I think about this and wonder, is that all there is? Debt ... equity ... debt ... equity as we oscillate from one type to another.

At the root of all this is the question, "What makes us think one or the other will provide greater stability or return?".

It seems to me investment as it is currently practiced is based on wishing and hoping.

What do I mean?

With debt, we believe the debtor will repay the debt with interest because ... why? He's a nice guy? He's a sovereign capable of taxing the population to service the debt? Somehow the debtor had not enough revenue today but will tomorrow? Why? Lately, no one of these has been borne out.

With equity, we believe the partner will return capital with gain because ... why? Same reasons as above for the debtor? But in this case, we are sharing the burden of generating the revenue required to offer a return. Sorta like saying we'll match every dollar the entrepreneur bets on the throw of the dice with one of our own and then cheer, "Come on Red!". Oops, mixed the games up, but does it really matter?

It seems to me investment should be clearly tied to productivity; clearly, transparently, obviously. That means investors invest in productive output and earn returns as part of that output, unit by unit. Anything else is a hypothesis and seems more like wishing and hoping, fiction in improved conditions making debt servicing achievable, myth that our simple investment actions when they incur returns aren't simply making the revenue generating pie smaller by an amount exactly equal to our return.

Isn't it about time we did the hard work of figuring out how relate investment to productivity, not in some vague theoretical way, but in some transaction by transaction of economic output way?