Last weekend, I had a great conversation about investments with some friends. They finally realized that there is a big distinction between assets & investments. While they’d never thought about those differences before, it occurred to me that most people haven’t thought about them either. I’m always surprised when somebody justifies a purchase with the term, “It’s an investment”.
“Oh, I buy expensive watches. They’ll be worth more in 20 years” a new friend said to me. “Buy a classic car – it’ll hold it’s value” was something I’ve heard before. Or, “I’m buying and holding on to great musical equipment like microphones, because good gear is always going to be good gear” was another comment. These bright, clever, and driven people claimed that all were good investments. But they hadn’t thought about it from the correct vantage point. If they had, they’d see apples and oranges…
I know why they had these opinions. It’s what they know. They’ve seen how some of these things have either maintained or grown in value over the last 30 to 50 years. I’m here to disprove that misconception. Then I’ll show them how to reclassify their current mindset for investing their hard earned money.
Let’s learn a few definitions – dry and clinical as they are:
Investment: The investing of money or capital in order to gain profitable returns, as interest, income, or appreciation in value.
Return On Investment (ROI): A performance measure used to evaluate the efficiency of an investment or to compare the efficiency of a number of different investments.
Rate Of Return (ROR): The gain or loss on an investment over a specified period, expressed as a percentage increase over the initial investment cost.
We use these terms when we invest. If we buy stocks, mutual funds, Trust Deeds, or even paltry CD’s at a bank, we ‘expect’ a certain ROI. While that expectation might not always be met, at least we have a target in mind.
When someone buys a $10,000 Omega watch, they usually aren’t planning for a safe, conservative, annualized return of 5.343% for each of the next 33 years. No. They’re usually thinking, “What a beautiful watch. I love wearing it!” Do you see how this is not an investors’ mindset?
A good rule of thumb to remember:
ALL Investments calculate ROR and ROI. Assets don’t need to.
This Omega watch may very well increase it’s value over the next 33 years. But depending on a 3% ROR each year is a little naïve. Why? Because nobody can predict what technological breakthrough might occur over that time, thereby rendering your $10,000 Omega watch obsolete. Perhaps you lose it. Or maybe an alchemist discovers a way to turn lead into gold… I know I’m reaching here. The point is this: The watch IS an asset. But expecting a Return on it is not why you’re buying it. You might defend your purchase that way, though. Learn to call it what it is, and get accurate about investments vs. assets. Watches aren’t investments. You’re not buying something because of the ROI over 7 years, but because it’s a nice piece of jewelry, and it looks great on your wrist.
From Assets To Investments: Here’s how to re-visualize it:
- Get Real: Investing isn’t merely believing something will be more valuable in 20 years. Rather, it’s target oriented, with the possible realization of those profits when that target is achieved.
- Get Clear: Know what your investments target ROI is. Then get out. While assets are also great to hold on to, these are not interchangeable ideas. Investments must be about growth.
- Get Going: Want 1% a year in a CD? Maybe 6% in the DOW? Perhaps you’ll only look at opportunities that pay no less than 10%. You get the idea. Learn about real estate investing. Then take action, even if you don’t have much money!
Studebaker, Omega, Neumann, and Chanel Bags are not investments, simply because there’s no way to gauge what a yearly ROR will be. But they can be fun, beautiful, and valuable assets. Just don’t confuse assets for investments.
Question: Can you figure out how to convert an asset you currently have into an investment that shows a solid return?