Hard Money Lending vs Stock Market Investment
Category : Blogs
Of Assurance and Speculation
The Macro: Stock Market
Speculation to me is nothing more than glorified gambling. For example, people buy stocks because they believe they will see a healthy rate of return due to a perceived inevitable increase in value. The question is, by what mechanism is said value being being ascribed? How does one value a partially intangible asset properly? The stock market operates on a macroeconomic scale. It requires you to fully understand the nuances of millions of moving parts and guess which variables will be the most consequential.
What you typically find with people discussing stock is a couple of talking heads giving opinions on which of the many causes they believe the main cause of a major dip or a rise to be. Just like in a casino and for similar reasons you are very unlikely to be a winner.
The Micro: Hard Money Lending
The business I do in hard money lending is quite a bit different. I assess individual tangible assets. I then use reliable market data to ascertain a price point at which it makes little sense for the borrower to default. These evaluations are what I would classify as a microeconomy. A microeconomy has few moving parts and nuance to understand after the initial groundwork is done.
For example, I use real estate to securitize my loans because it’s something I am able to accurately evaluate the value of (via location, income stream, size, amenities, tax records, etc). From there I simply adjust my price point before a deal is struck. The degree of uncertainty in this hard money lending strategy is astronomically low. To this day I have not had to foreclose on a single client. This is because I qualify the value of assets with enough leeway for my evaluation to be off by a bit. After all, what if I over speculate?
I don’t want to be in the speculation business. I want to be in the business of assurance for the sake of the customer, and my sanity. Riding waves or building in bubbles are an open invitation to a stress aneurysm. It’s an important distinction between micro and macroeconomies, the feasibility of reliably calculating the outcomes of each business interaction.
Food for thought,
Nathaniel S. Fulford