Assuming that only such essentials were invested into, one also encounters strange hybrid beings stalking this investment landscape that drive up or down the prices of even these essentials: complex derivatives, debt-leveraged and price-inflated artificial demand, instruments that are meant to distribute risk (like mutual funds) but due to their mix of different types of products, presenting a dubious proposition- and so on.
In the past few years we have seen the rise and fall of many hypes, translating into bubbles and bursts, among them real estate (which is a 'real need'). The derivatives and easy credit clearly inflated that market, and the instance serves as a good example of a situation in which investors put the cart (derivatives, credit-fueled prices, capital gains prospects) ahead of the horse (the real need for housing).
A few months ago an investment advisor warned me against placing any money in the realty sector in emerging markets. As an Indian I wasn't seeing what he was seeing- a crash in the real estate funds as well as one large realty company. I was seeing parcels of land in rural southern India which I bought at a reasonable price, which has appreciated on expected lines. The land lies in a zone which is seeing demand from people returning from overseas or others who wish to live just outside of the cities in which they work. The demand is also fueled by infrastructural developments in the vicinity of these parcels. The 'real need' usually pays. The derivatives are priced at perceptions of capital gains of those derivatives and not necessarily the underlying asset. This market is volatile due to any number of reasons, significantly the worldwide loss of faith in real estate.
Let's take the example of clothing. There are many brands that are mere relics of once-famous icons. In the US, the demand for clothing is pretty consistent but the demand for brands is more volatile. What are the essential clothing? Well- the essentials literally. Underwear, socks, casual jeans and so on. There are good ways to judge a sound investment in these categories by the volume and scale of their reach and their portfolio of clothing options.
Water is a real need. Water purification systems may be here to stay. And so may be safety systems. Hoping for quick capital gains based on derived demand may prove to be the long term loser.
The best example of this is in currency markets. I know of people who have invested in Euros in the early stages of the recent recession. Clearly that did not turn out to be a good idea. The internet is buzzing with $500 billion disappearing from investors' wealth due to their holdings in foreign currency derivatives, notably those with the Dollar as the underlying asset. Their moment of loss came during the short term value loss which the Dollar experienced 2-3 years ago. Remember the value climbed significantly afterward. When the largest debt in the world and the vast majority of traded goods in the world are denominated in US Dollars, and the world's most forex-rich nations (China, South Korea, India) hold over $2 trillion in USD (and intend to keep its value high as they need this reserve to spend), it must be understood that the USD will have a high value in the medium term (and likely the long term as we know it). For a firm exporting its goods or services from a different country into the US, it was (as it always has been) much more advantageous to keep its earnings in USD within the US or in a tax haven. Instead many of these small scale businesses converted USD into local currency, then bought USD derivatives which saw their value trough out and peak in succession. When they troughed out these companies had their contracts cancelled and suffered a great loss of value in their wealth. When they peaked they no longer had those derivatives in hand and thereby could not get any of this value back. The financial institutions which underwrote those derivatives laughed all the way to the bank. The underlying asset- in this case the USD- proved far more reliable than its own derivative.
I believe in the future (and now) the investors who reap profits will be the ones who abide by Benjamin Graham's principles of 'real need' and 'understanding the business' in which you invest. Gold may have been somewhat stable. But in the absence of real need gold is about as wobbly a deck of cards as you can get. On the other hand watch out for artificial demand which inflates prices.
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