The way I see it, an investment has to be something that can generate cashflow. Stocks give dividends, bonds give interest and real estate gives rental income. These are real investments.
However in the strange World of Wall Street Craft, anything and everything becomes a feasible investment, an asset class of its own. The recent boom earlier this decade being commodities.
But if you think about it, commodities shouldn't be considered an investment bcos you don't get a cashflow. Holding a ton of copper, or a ton of wheat doesn't give you cashflow. The whole premise is based on prices going up. And when it's based on just prices going up, then it's dangerously close to the idea of the Greater Fool Game. Where you can only make money by selling something that is worth very little, at a higher price, to a greater fool who is willing to buy.
That is why value investors are not interested in price, we are interested in value. Price merely tells us if we can get the asset below its value. If there was no transparent price on the asset, we are happy as long as we have cashflow. But if there is no cashflow, you cannot calculate an intrinsic value of the investment. And in that sense, commodities cannot be classified as an investable asset class. Needless to say, a lot of the newly created asset classes like art, wine, vintage watches and other funny stuff cannot be called investment.
However, if those above mentioned can somehow be construed to generate cashflow, then the story becomes different.
For e.g. if a couple of artworks can be put together at an exhibition hall, and the owner can charge fees for viewers, then we have a cashflow, and the whole business can then be valued. In the same vein, wine is not an investment but the vineyard is. Copper may not be a true investable asset class, but a copper mine or a mining co. is definitely investable.
Similarly, traditional assets that count as investments may not be such if it doesn't generate cashflow. The best examples would be perennial loss making companies. Think Chartered, NOL and the likes.
As the saying goes, cash is king. Well if cash is king, in my opinion, cashflow is then the true master of the universe.
However in the strange World of Wall Street Craft, anything and everything becomes a feasible investment, an asset class of its own. The recent boom earlier this decade being commodities.
But if you think about it, commodities shouldn't be considered an investment bcos you don't get a cashflow. Holding a ton of copper, or a ton of wheat doesn't give you cashflow. The whole premise is based on prices going up. And when it's based on just prices going up, then it's dangerously close to the idea of the Greater Fool Game. Where you can only make money by selling something that is worth very little, at a higher price, to a greater fool who is willing to buy.
That is why value investors are not interested in price, we are interested in value. Price merely tells us if we can get the asset below its value. If there was no transparent price on the asset, we are happy as long as we have cashflow. But if there is no cashflow, you cannot calculate an intrinsic value of the investment. And in that sense, commodities cannot be classified as an investable asset class. Needless to say, a lot of the newly created asset classes like art, wine, vintage watches and other funny stuff cannot be called investment.
However, if those above mentioned can somehow be construed to generate cashflow, then the story becomes different.
For e.g. if a couple of artworks can be put together at an exhibition hall, and the owner can charge fees for viewers, then we have a cashflow, and the whole business can then be valued. In the same vein, wine is not an investment but the vineyard is. Copper may not be a true investable asset class, but a copper mine or a mining co. is definitely investable.
Similarly, traditional assets that count as investments may not be such if it doesn't generate cashflow. The best examples would be perennial loss making companies. Think Chartered, NOL and the likes.
As the saying goes, cash is king. Well if cash is king, in my opinion, cashflow is then the true master of the universe.
buying commodities with leverage helps to enhance cash flow by freeing them up :-D
ReplyDeleteI agree with you cash is king.
ReplyDeleteBut NOL is not actually a commodities investment. It is a very highly cyclical investment:- Bear/Bull markets. During peak economic cycles NOL had generate a lot of cash, not to mention capital gain. I had benefited at least 2 cycles during my younger days.
Alas, I give this present cycle a miss, if not I would have paper- profitted 100K in capital gain, even at today price.
Why? Because I am about to retire and lean heavily to "dividend income" investment:- Cash is King investment.
After said this, I dare to invest in NOL heavily in the past, because I think our Yament may let SIA close or change hands but not NOL. Because it's our "National Shipping Line". THE LIFE-BLOOD of Our Nation.
My 2 cents worth.
I agree that Cash is King.
ReplyDeleteA lot of things nowadays, like real estate properties, stocks, mutual funds, etc, are just paper values.
When people speculate, the prices will goes up, sometimes to unreasonable prices. But, they are just figures and values.
We must remember that everything goes up, they are bound to come down.
Hi All,
ReplyDeleteThanks for the comments.
While cash is king, cashflow and cashflow yield, IMO, might be more important. If you can put $100 into an investment that gives $10-15 every year without you having to buy or sell or worry if you can get back your $100, then this is really the best investment there is.
The problem with many investments, sadly, is not like that. You have to monitor prices, sell high to a Greater Fool, to make money. This gets tiring after a while.
So look for good investments with good cashflow yield. That would be my point.
What about investing in gold? I am thinking about it but have no clue whether it is a good time to buy now.
ReplyDeleteGold is definitely commodity investment. So it is a speculative investment. But you can buy it as a "insurance investment" if you can afford with spare cash. And may you be blessed that you do not have to use it. Or when you need to; the price of Gold is at least keeping -up with inflation.
ReplyDeleteThis is my personal view of Gold.
Lawrence
Well Gold is on an uptrend now and the market is pushing for new highs.
ReplyDeleteAlthough it has now reached a point where it may correct/retrace, the market has predicted Gold to reach $1,500 to $2,000 for the next couple of years.
One of the reasons is that U.S FED has accumulated so much debts and what they can do is to print trillions of dollars and they will not stop doing that. As U.S dollar devalue, inflation will take place and precious metals like gold and silver will rise.
Gold is surely a good investment to diversify your portfolio and protect your wealth. But you would need to buy when it retraces and not at the highest point.
Daniel
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