The Language of Investing
It never ceases to amaze me when, from time to time at our meetings, I will bring up this topic and discover that many investors simply don't understand the correct definition for certain investment terms that are used most frequently. Take for example, the meanings of money and wealth.
Most of the blame for this in my opinion rests with our educators. If you were given a definition for money when you were in school, it probably went something like this: "Money is a generally accepted medium of exchange of goods and services,for measuring value, or for making payments." Now that definition tells us what money does, however, it fails to tell us what money actually is!... To an investor, money can mean only one thing... power!... A given amount of money provides an investor with the power to do whatever that amount of money will allow him/her to do with it...period!
Now for the other term, wealth. Many investors believe that money is wealth and that cannot be because we have already learned the true definition of money. And I'm certain that they never discussed wealth in school because any teacher who does understand its meaning would likely not be in the teaching profession. So here now is the best definition of wealth that I have ever been able to find: "Wealth is anything that produces an income stream." Again, a clear and simple definition. So from that, we can see that money can lead the way toward wealth, but of and by itself, money is not wealth!
There are two other terms that tend to have investors confused at times and in fact, we got into a serious discussion at one of our meetings when I brought up the terms,
asset and liability. If you look up the standard definition for an asset, you will be given something to this effect: "An asset is something of monetary value that is owned by a firm or an individual." Now that definition in my opinion is simply plain accountantese. It really does not serve the needs of an investor because it doesn't tell us exactly what an asset really is. So in easy-to-understand English, an asset is anything that puts money in your pocket, while a liability is anything that takes money out of your pocket. And when you can understand these definitions of asset and liability, you then can understand why it is that your home is really not an asset. Oh, if you have a mortgage, then your home IS an asset to whatever lending source holds the mortgage on your home, but for as long as you own that home, it is continually taking money out of your pocket and it cannot truly be considered to be an asset until the day that you sell that home and you can show on paper that your selling price, minus all the expenses that you incurred while you owned that home, has resulted in a net profit.
Any comments?
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Most of the blame for this in my opinion rests with our educators. If you were given a definition for money when you were in school, it probably went something like this: "Money is a generally accepted medium of exchange of goods and services,for measuring value, or for making payments." Now that definition tells us what money does, however, it fails to tell us what money actually is!... To an investor, money can mean only one thing... power!... A given amount of money provides an investor with the power to do whatever that amount of money will allow him/her to do with it...period!
Now for the other term, wealth. Many investors believe that money is wealth and that cannot be because we have already learned the true definition of money. And I'm certain that they never discussed wealth in school because any teacher who does understand its meaning would likely not be in the teaching profession. So here now is the best definition of wealth that I have ever been able to find: "Wealth is anything that produces an income stream." Again, a clear and simple definition. So from that, we can see that money can lead the way toward wealth, but of and by itself, money is not wealth!
There are two other terms that tend to have investors confused at times and in fact, we got into a serious discussion at one of our meetings when I brought up the terms,
asset and liability. If you look up the standard definition for an asset, you will be given something to this effect: "An asset is something of monetary value that is owned by a firm or an individual." Now that definition in my opinion is simply plain accountantese. It really does not serve the needs of an investor because it doesn't tell us exactly what an asset really is. So in easy-to-understand English, an asset is anything that puts money in your pocket, while a liability is anything that takes money out of your pocket. And when you can understand these definitions of asset and liability, you then can understand why it is that your home is really not an asset. Oh, if you have a mortgage, then your home IS an asset to whatever lending source holds the mortgage on your home, but for as long as you own that home, it is continually taking money out of your pocket and it cannot truly be considered to be an asset until the day that you sell that home and you can show on paper that your selling price, minus all the expenses that you incurred while you owned that home, has resulted in a net profit.
Any comments?
* * * * *
posted by Bob Moser at
6:44 PM
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