Buy what you can touch

“I am afraid of cash.”

This is what my friend told me today. When he started to speak, I listened, because he had a very good reason to say that. A reason deeply rooted in his personal experience.

In the mid 1990s, my friend was a very successful professional in his home country, Zimbabwe. His earnings allowed him to not only lead a comfortable life, but to save some money. When my friend had a son, he decided to invest some money towards his son’s college education and placed $200,000 Zimbabwean dollars in a PAPS account, which is similar to a college fund.

My friend’s son was set to go to college when he grew up… Until hyper-inflation hit.

When hyper-inflation hits, people want to spend their money as quickly as possible. When a unit of money is worth less with each passing hour, it makes no sense to have any savings. So my friend contacted the investment company that held the college fund money and requested to withdraw it. He couldn’t believe what they told him…

“Presently, we buy paper at Z$ 500,000 per single sheet” – an account manager told my friend. “Your Z$ 200,000 investment contract was not worth the paper it was printed on, so we just extinguished the contract.”

Extinguished? Yes – they destroyed the contract, and with it, my friend’s hard-earned money. But is the investment company at fault here?

After my friend finished telling me his story, he told me his opinion on the situation. He said that a country never goes broke. A country can always print more money. Diluting existing currency effectively steals money from the country’s citizens, who have their savings in that country’s currency. They are the ones going broke.

I then asked my friend what he does now, living in the USA and facing already-happening inflation. He buys only assets that he can touch. Real estate is one asset class in which he is interested. Interestingly, stocks are another – although one cannot touch a stock of Walmart, one can surely go to a physical Walmart store. My friend does not usually pursue investments beyond these two asset classes – simple approaches tend to work the best.

I derive another lesson from my friend’s story. Whatever you buy, make sure your ownership is protected by strong property laws. Imagine the remote and unlikely, then defend against it, because the punch that knocks you out is the one you don’t see coming.

A mention of securities in an article is not a recommendation to buy or sell it. Investment in securities involves risk and is not suitable for everyone.

Leave a Reply