What is an Investment ?

POSTED BY Rokhan ON March 2, 2014 9:48 am COMMENTS (8)

Well, this is not so much of a question to Ashal, Manish & Co, but a general question for readers to think about.

When I think of investment my thoughts are on putting my money to work so that it will give me returns greater than what I initially invested. Now, for it to return a higher value than originally invested, it has to increase in value itself, and not just value in terms of Dollar/Rupee amount (i.e. price), but what good is it worth for and/or how much value it can give in the future.

So if I buy a chair for Rs 100, it is a chair worth Rs 1000 (hopefully not less), but that is all it is. If I leave it as it is for 10 years and then sell it for Rs X more than or less than Rs 1000, is there a change in value of the chair? I would say the change is in price and not value because the chair has not turned into something else. The chair is still a chair thats only good for sitting on – same as it was 10 years back. So the change in price (not value) of the chair can only be attributed to inflation and value of money. There is no change in value unless the condition of the chair has deteriorated.

I hope till here everyone will agree with me. I hope everyone will also see this a simple trade (purchase and sell) for what is the price one can get for the chair rather than an investment

But what puzzles me is how people see the purchase of real estate and gold as investments rather than simple trading (with hopes of selling at a profit). When you purchase a land or house and sell it after 10 years – does the value of the estate change or does only its price change? Same for Gold which is not even a useful asset to start with.

When so called ”investing” in Gold or Real Estate, aren’t all we doing is buying at a price and selling at another. We expect the price to increase of course but due to what reasons – supply and demand factors or simple inflation and change in value of money?

Is that what is really considered investment? Or is it just blind speculation and trading?

Next, if you believe in long term value investment (over day trading) which is something everyone loves to claim, how do you manage this conflict when doing trading with real estates and gold?

8 replies on this article “What is an Investment ?”

  1. ashalanshu says:

    Dear Rokhan, regarding GOLD, it’s possible you have read it already.

    http://finance.yahoo.com/news/why-warren-buffett-hates-gold-120228611.html

    So on Gold, Yes I’m with you on the same page.

    For those people, who ‘ll say that Gold is a hedge and ‘ll come for rescue in testing time, I have seen a lot of cases here in JI forum itself where people are not ready to sell GOLD but ‘ll be happy to pay interest on 50-60% value of Gold. 🙂

    Thanks

    Ashal

  2. Hi Rokhan

    I understand your query . When you put a seed in soil , its just a SEED, which cant do much, its value is not much . But then in few years , it becomes a tree and then its VALUE is increased which is 10000X more .

    Now when you come into MONEY area, then investment definition itself is that your money goes up . Think of your Rs 1,000 as SEED, now what you do with it so that you get back 10 times more means the VALUE has increased . So I am not 100% in agreement with your way of thinking (or I have not understood what you want to say) .

    So now , When you buy a LAND somewhere outside the city, the VALUE is less, because you cant do much with it , if you make homes on it, no one will buy it , but then in 10 yrs, its VALUE will go up because now it makes sense to buy them because you have amenities around, schools, hospitals and it makes sense to live there, so the value goes up .

    So finally I want to say that in these cases, PRICE and VALUE is same .

    Manish

    1. Rokhan says:

      Dear Manish

      Thanks for your reply – yes, I can agree in the case of land to an extent because the land’s value will increase due to its surroundings. Although in India, I see price of land increasing irrespective of its actual value (and at much higher rates than inflation) which is only explained due to scarcity and demand (similar to stock prices in a bull)

      What about Gold though?

  3. vijay says:

    Nice thought and well put too. I agree with your basic premise on value vs trading. Guess that’s one of things that separates a Warren Buffett from a regular ‘investor’. Isn’t that what separates the top fund managers from mediocre ones where one seeks and is able to better spot value-added investment avenues?

    I guess that forms part of what people mean when they scream – understand market, understand risks and volatility, understand sentiment….

    Fundamentally, most business owners understand this. A farmer that own a vineyard knows his profitability lies in value-addition to those grapes in for the form of wine, juice, jams, and such….similarly for other produces. A pharma company knows its profit is closely linked to its patents and new drugs. Similarly for other manufacturing and IT industries.

    For the investor the challenge then becomes recognizing those at the helm that are visionaries. Identifying a Tata, Carnegie, Ford from the bunch….

    1. Rokhan says:

      Dear Vijay, than you for sharing your thoughts. Insightful indeed

  4. ashalanshu says:

    Dear Rokhan, I’m itching to answer but restricting myself as you clearly mentioned that we should not answer. 🙁

    Thanksd

    Ashal

    1. Ashal

      He does not mean that you or me cant answer, but wants everyone to contribute, so please add your answer . I am going to do from my side 🙂

      Manish

    2. Rokhan says:

      Dear Ashal

      Please do share your thoughts.

      I only meant this is not a problem where I am looking for a quick solution from experts like you, rather to initiate discussion or retrospection from everyone.

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