Too Much of a Good Thing
We often hear people say that we need to “invest in the future.” But over-investment is one of the easiest ways to destroy wealth. A few examples make this clear:
In the middle of the last decade, the US overinvested in residential real estate. “Liar loans” and “NINJA mortgages” made it possible to build mansions in the middle of nowhere, and the housing boom and bust ensued. Japan overinvested in heavy industry in the ‘80s, and its “lost decade” is still with us, 20 years later. The fearsome “Japan, Inc.” has become “Japan, the aging and stagnant society.” Russia overinvested in the ‘60s and ‘70s when it should have been satisfying consumer demand
And overinvestment isn’t limited to governments. Kodak invested too much in its film business in the ‘90s and didn’t prepare for the digital revolution. Donald Trump has serially overinvested in casinos and hotels, and has ridden the bankruptcy process over and over again. For the life of me, I can’t understand why people see him has a business success—he’s really just managed to game the legal structure of in different states to enrich himself. The result has been a boom and bust in the gaming industry.
The point is that investment isn’t an unalloyed good. If an individual, company, or government invests in an industry or technology that has a marginal or negative return, that money will be wasted. Investment is a good thing when it goes into an area with scarce resources and a bad thing when it follows the herd into a glut. A boom and a bust inevitably follow.
People need to save, and that savings needs to be invested. But the object of investment is just as important as the amount. Otherwise, all that wealth is wasted.
Douglas R. Tengdin, CFA
Chief Investment Officer
Follow me on Twitter @tengdin