September 5, 2016
In my personal experience one of the most misguided financial concepts the people have is the meaning of investment. After discussing finances with many, either directly or through the talks I give, I think the difficulty of understanding what things are an investment is that people confuse what is to invest with the purchase or acquisition of assets. So when someone buys a house or a vehicle is common to hear say “you made a good investment”, when in fact what perhaps should be said is “You have made a good purchase” (of an asset), which is something very different and we proceed to explain briefly.
Financially and economically speaking, to make an investment is the act of acquiring or buying a commodity we call capital. Of course, capital can be part of our stock of assets; however, not all assets can be called a capital. What differentiates the capital of any other asset is that capital produces value or money over time. In that sense, some examples or forms of capital are a bank certificate (interest-bearing), the vehicle used by a taxi driver to work (produces an income for the space of time which he rents it to his passenger) or knowledge acquired by training or college. This latter form of capital is called human capital. As we see, the capital may be tangible or intangible, and its essential feature is that it gives us an income over time.
From the above, we derive that investing is any action aimed to increase the stock or amount of capital we have. That is why when purchasing a vehicle for daily use, appliances or a home, we say that we acquire assets, but not that we are investing. The nature of any asset is be depreciated or lose value over time, so we must make expenditures for maintenance. Sometimes assets may rise or fall in value because of sudden events or in response to supply and demand conditions of the market. But this does not alter its nature to go depreciating over time.
The next time you want to know if something you purchase is an investment, first ask yourself how much money that thing you buy will put in your bank account.