How to Know if Your Investment is Really an Investment


So you’ve finally gotten to the point where you decide to take charge of your life.  You’re going to act more responsibly now and try to save money.  You’re willing to cut your expenses and even lower your standard of living just so you can sort out your personal finances.  No more excess partying.  Mo more splurging. You are now willing to sacrifice in order to have a better and brighter financial future.  You’re going to save and stash every single penny you can and you’re going to invest it in things that count.

But hold on for a moment.

You have to make sure you know what a real “investment” is before you start locking in all your hard-earned savings into anything.  You see, a lot of well-meaning people actually mistake cash-sucking, life-shackling expenses for investments. Determining whether or not something is an “investment” is not always black and white.  Not all assets in an individual’s balance sheet can be considered investments.  Purchases like a family’s house or car – which, conventional wisdom commonly identifies as investments –  may not actually be investments.

An investment has one fundamental characteristic.  It produces profit.

Now consider the young professional who dreams of having his first brand new car.  He’s got it made.  He right investment choices | LOMlanded the perfect job and now has a monthly salary enough to pay for the monthly amortization.  He just eats hotdogs for lunch and eats dinner at home.  He stopped drinking luxury coffees and finally he’s been able to come up with enough cash for the down payment on the car.  He’s ready to make this “investment.”  Unfortunately, it’s actually not an investment.  Although a lot of sacrifice, self-control and financial prudence was necessary for him to be able to save up for the down payment, the whole exercise in self-denial doesn’t turn the brand new car into an “investment”.  He threw away all his savings into a cash-guzzling mechanism.  The car immediately declines in value the moment the yuppie drives it off the lot.  (Yuppie already lost money there).  After that, more money will have to be paid for interest expense on the car loan, car insurance, gasoline, toll fees, parking fees, taxes and regular maintenance costs.  When does the “profit” aspect of the “investment” show itself?  Never. So, nope.  It’s not an investment.

On the other hand, another guy might want to buy the very same car model as the yuppie but intends to use it for his Uber business.  Let’s put aside the issue of whether an Uber business is actually profitable for now.  This guy’s intention to generate profit from using the car makes his purchase a valid and true “investment.”  Of course, he only profits if interest, fuel, maintenance and all the costs mentioned previously are more than covered by what he earns from driving people around. But for all intents and purposes, the car he buys is an investment.

And then there’s every family’s dream of owning their own home.  The bigger the better.  Again, interest expense, real property taxes, association dues, maintenance and other costs will all have to be paid in owning the house.  Will there be any profit generated?  None.  You might say the property’s value is going to appreciate because the “investor” chose his location well.  Fair enough.  But remember, this is the “investor’s” dream home.  He’s going to retire and grow old in it.  He’s going to watch his grandchildren and great grandchildren run around its beautiful backyard.  They’re going to have decades upon decades of family reunions in that house.  In other words, the “investor” is never going to sell that house.  Hence, regardless of any appreciation in its price, there won’t be any realized profit.  Conclusion, it’s not an investment.

In contrast, a senior couple want to use their retirement pay to build a small row of apartment units.  It is their hope that the rental income from the property they build will provide them with some passive income to augment their pension and sustain them for the rest of their life.  All the expenses related to home ownership will still be incurred by the senior couple.  However, they will also be earning an income and hopefully making a profit from their real property.  This makes a house an investment.

From these examples, we see how an asset – like a car or a house – can be an investment for one person and an expense for another depending on how the owner intends to use it and we explain it more at LOM.  If intended for personal use, then it is not an investment.  If used to generate profit, we can say that it is a valid investment.

Posted in Investment | Comments closed

Defining Success: The Partner and the Farmer

businessman and farmerFrom the time we are born, other people are around us are already trying to push us towards “success.”  My parents wanted me to study well in high school so I could enter the best university.  I wanted to study architecture but my Dad said the money was in accounting.  If I wanted to succeed in life, I ought to follow where the money goes, he said.  In college, my classmates and I were in a constant state of cooperation and competition.  The goal was to get the highest grades, to best the other team, to pass the board exam, heck to top the board exam.  Then I started working.  I had to put my best foot forward. I had to sell myself, push to get the best compensation package, work my ass off so I could get promoted.  Office politics, intrigue and backstabbing was a normal thing I had to get used to.  One time, I told my friend at work that I wanted to resign because I couldn’t handle any more of it.  She told me I would have lost the game if I quit.  She said it was part of life and either I learned to roll with the punches or just bail out and become obsolete. Up to now, I think of that of advice and I still am not sure if it’s partially correct or absolutely wrong.

I transferred to a stock brokerage after my first job.  My officemates were not back stabbers or rumor mongers this time.  However, it was a different kind of battlefield I had entered altogether.  Stock trading was a zero sum game.  Whatever you gain, it was what some other trader had lost.  As much as you can, you want to sell your investment at the peak.  That’s your goal, impossible as it may seem.  But with such a goal, you are effectively hoping that the person you sell to loses money.  If you sell at the peak, it means your buyer will have to sell the investment at a price lower than his acquisition cost. That means he sits on the losing side of the trade.  His failure, your success.

I thought that was success.  Money.  Career advancement.  Always staying ahead of the game.  However, later on in life, I met two people who made me stop and reassess my definition of success.

The first guy is a partner in a big four accounting firm.  For a while he was my ultimate boss – up there at the top of the org chart- and I looked up to him with awe.  I never really got to talk to him that much except for a few nods and hellos in our building lobby.  I never even dared to acknowledge it to myself, but I knew I hoped with all my heart I could reach his status in life one day.  He was well respected by his peers and leaders in the finance industry.  Our big clients, the top officials of multinational corporations sought his financial advice. I assumed he had the perfect career and had reached the pinnacle of success.  Until one day, it was announced that he suffered a severe heart attack and fell into a coma.   For weeks he stayed unconscious until he finally awoke.  However, he was completely paralyzed and had to undergo intensive therapy just so he can start sitting down and make a few basic movements.  He had to retire because of that.  At the age of fifty, he had to retire not just from his career, but from even just living a normal life where a man is free to move and do what he pleases.

The second guy is an old man in his 70’s.  I met him when our family invested in a vacation cottage in the Farmer-with-Businessmancountryside.  The old man was born in that secluded part of the country and never really left the place all his life.  His business was tending other people’s cows.  He invested whatever money he earned from herding cows into his small squash farm.  He had a wife, 2 sons and 5 grandsons who also helped him plant squash.  Although his house was a rundown shack, the family spent most of their days out in the fields, picnicking outside.  Life was hard, the man said, but they were able to make do with what they had.  I looked at him with awe.  He was 70 plus years old but looked healthy and young for his age.  It was probably the sun, the fresh country air and their basic diet that made him strong and sturdy.

These two men I have gotten to know, they made me think twice about my definition of success.  I used to fancy the life of the partner in our firm.  But if you ask me now to choose from these two, I would definitely choose to be the old farmer who still works the land and tends his cows today.

And so, I’ve realized that success isn’t simply advancing your professional career or making a lot of money.  It’s not even how people respect you or value your advice.  In the case of my boss, his health capsized and he lost his “success” in a flash.  I am sure, he would trade all his past success with that old farmer just so he could move his legs and walk around now.

So what is success?  If the old farmer is successful, what makes him that?  He lives in a shack.  Hasn’t travelled much.  Doesn’t have a wide sphere of influence.  But he’s healthy and he loves what he does.  He has reached a ripe old age and still hasn’t retired from his job, simple though it may be.  He has a wonderful family.  They lead an idyllic life of simple joys.  They don’t strive for much.  They’re content with what they have.

The partner invested in money and his career but the price for that investment was his health and well-being.  The investment was a loss in the end.  The farmer invested in his health and well-being although the price for it was his career (or lack thereof).

As for me, I’ll take the middle road.  A balanced life where you have enough influence and resources to help more people and yet enough time to enjoy life, family and health.  Big dreams and yet simple joys fulfilled.  Maybe that would be success.



Posted in Investment | Comments closed