Imagine all your investments you possess and answer this question. Are you unsure about the answer? In today’s article, we analyse both of these investment types with examples.
In the first group, there are investments or assets that generate cash flows and produce a certain output – productive assets. We are pushing our purchasing power further and we expect that our purchasing power will be bigger in the future. You can imagine mainly shares, bonds, agricultural land or real estate for rent. Take, for example, a well-managed company. Money flows through it, and when it is successful, at the end of the period, there are more money (free cash flow). Land produces different crops, from the property, you have regular rent. And we can sell all these assets at a market price at any time. Another example could be bonds, where we know exactly what the financial flows are and how much they will generate to us.
In the second group there are assets that will never produce anything – non-productive assets. Investor buys them and hopes that someone else will buy them in the future at a higher price. Its character is from the short-term point of view more speculative. These include, for example, bulbs of tulips, art works, stamps, antiques or even gold. To increase the price, the interest and number of purchasers in the market must also increase. Gold and Mona Lisa’s painting will always remain gold and painting. It will not multiply itself and it does not produce anything. It is true that we can rent a painting to a gallery, for example, but we cannot expect this situation. I have gold in my portfolio, but only in a few percent. It balances the situation when stocks fall.
Warrenn Buffett and two piles
Imagine two piles. Pile A is made up of 170,000 metric tons of world gold. If we make a cube, one side will have a width of about 20.7 meters. Suppose the price of such a cube is $ 9.6 trillion.
Let’s create a Pile B that costs the same. We buy all agricultural land in the US, then 16 Exxon Mobil shares, which is one of the most productive companies in the world, with profits of over $ 40 billion a year. After these purchases, we would have another $ 1 trillion left.
After time, the price of the pile A increases or decreases by the mining, supply and demand, but the pile size remains the same. From pile B we get dividends from stocks, our land produces tons of corn, wheat or even rapeseed oil. Which pile would you choose, A or B?
There are many investments and individual assets where we can invest to. Some can multiply itself, produce beneficial values. Some remain fixed in the same volume, only their price tag changes. Whether you choose any investment, do not just think of the potential revenue, but also include other insights. For example, today’s productive and unproductive assets. Invest reasonably, not with emotions.