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FORTUNE -- Investing is often described as the process of laying out money now in the expectation of receiving more money in the future. At Berkshire Hathaway (BRKA) we take a more demanding approach, defining investing as the transfer to others of purchasing power now with the reasoned expectation of receiving more purchasing power -- after taxes have been paid on nominal gains -- in the future. More succinctly, investing is forgoing consumption now in order to have the ability to consume more at a later date.
From our definition there flows an important corollary: The riskiness of an investment is not measured by beta (a Wall Street term encompassing volatility and often used in measuring risk) but rather by the probability -- the reasoned probability -- of that investment causing its owner a loss of purchasing power over his contemplated holding period. Assets can fluctuate greatly in price and not be risky as long as they are reasonably certain to deliver increased purchasing power over their holding period. And as we will see, a nonfluctuating asset can be laden with risk.
Investment possibilities are both many and varied. There are three major categories, however, and it's important to understand the characteristics of each. So let's survey the field.
Read the complete column by Warren Buffett himself.
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A couple decades ago, here in Alberta we had a very severe recession when oil prices fell then stagnated after the 1970s bubble. Thousands of people lost their homes, house prices in real terms dropped substantially, unemployment was very high. It was very bad - on par with what the US, Greece and other countries are going through right now.
What surprised me though was that when things looked their worst, those that still had jobs continued to buy things. Food courts and cafeterias were full of people. No bagged lunches for them.
In tough times people cut back but they absolutely hate doing so. As long as governments step up with support programs to buy people time while panic abates and some normalcy and old spending habits can return things will be fine. However, let people experience another Great Depression and you'll see sudden and permanent changes in attitudes - no one spends, no one borrows, no one lends, no one works.
As my father said; 'in the Great Depression there was lots of money around but no one dared spend it as they never knew it they'd get any more.' A large percentage of the populations and entire generation or two were permanently affected. Thank goodness for federal programs like interstate highway construction, the post war baby boom, shots to the moon and electronics to increase the velocity of money as the seniors I knew we so hurt by the GD that they swore off all discretionary spending.