Wednesday, January 27, 2010

Null Inventory

Finally, in this series about calculating inventory, this post will review intangibles and money itself as a marketable item.

Where money is traded for human behavior, such as labor and services, that has already been excluded. I ruled out laborers as having any sales value given that people cannot be legally owned, and even if it were legal, due to the high maintenance, they would not be a particularly good investment. Better to pay them wages and be done with it.

Regarding labor, consider a contractor who sells promissory contracts for their labor, as in: "pay me now and I will paint your house in two weeks." If the house is sold in one week, that promise has marketable value; one can increase the price of the home by the amount of that contract, since it is a promise the house will soon be painted or the money will be refunded. But it is the painted house that has inventory value, not the work that paints it.

Say a masseuse does the same thing, selling promises of a massage redeemable on demand. Are those promises marketable items that can be added to inventory? They could be bought and sold, sure. But the massage itself is an action rather than a thing, so there is no way to factor it in to the inventory.

Gifts of money are not counted as inventory either. In this light, neither charitable contributions nor taxes are an inventory item. Similarly where money is exchanged for money, that has no inventory value. In the cash-inventory equivalency, money is the yardstick by which inventory is measured, so it cannot be included in the inventory ever.

With bonds, money up front is exchanged for money paid back over time with interest. Securities or loans are not factored into inventory. Gambling is paying money in exchange for a greater payout if a specific event occurs, like a royal flush or the right number in lotto. Insurance policies behave in the same way, including health insurance, where money is charged in exchange for a promise that money will be paid to the doctor in the event of a doctor's visit. Similarly, all the derivatives on securitized mortgage tranches is just a gamble with no effect on inventory.

The take home point is that inventory has to be a durable thing, and it cannot be money itself. While intangibles and money itself have value and are bought and sold all the time, they will not factor into the inventory.

The next post on this topic will summarize the calculation of inventory, and distill it to a few essential rules.

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