The Investing Fundamental: Some Jargons

What is investing?

Let start with 2 simple definitions of investing terms:

• “Investing” is simply activity of buying or selling an asset to produce either income or growth or both.
• “Asset” is good or services that can grow in value.

Buying a brand new car is definitely NOT an investing activities. Why ? Because the moment you drive the car outside the car dealer, probably it loses 20% of the value already. (Just try to sell it back to the dealer a week after). So this car is not an asset, hence not an investment.

But, if you own a very rare car which is classic and antique. This is probably an asset because as the time goes by you can sell it for more money.

Another important example: your own home (the one you live in it) with its mortgage/home loan. Although it’s true that the value can be significantly increase in time, but it’s not being used to derived any income. Therefore it’s NOT really investing.

In fact, usually your home mortgage is the single biggest liability that you ever have. Of course, there are things that we can do to make our home become income producing asset. We’ll discuss this later.

But if we buy other house (that we don;t live in it), then we rent it to somebody else, so that we not only received rent as income but also can enjoy the growth of the house. This is a good investing example.

The same thing with buying share. Although we could just buy and do nothing about it (a.k.a as BHP strategy – Buy-Hold and Pray) , it’s still investing, as the share can grow in value. Beside that, wwhile we are hold on to itm e may have received income from dividend once or twice a year (it’s up to the company)

Or you can buy a business, for example you buy a corner store near your place. That’s also an asset that give you income, hence it’s an investment.

One thing to remember is: although you are buying asset, it is not guaranteed that you always make money of it. As there is always a “risk” attached to any investment. (Share can go down, Property can went bust, etc)  -  What you need do is, to manage that risk low enough to make overall investment producing profit for you.

Income vs Growth

What is the difference between income and growth:

• Growth: is the comparative value of the asset compared to the buying price. We don’t need to sell the asset to enjoy growth value, we just simply to re-value it.
  Example: we buy a house at the price of $300,000. 5 years later the price become $500,000. Then we are getting $200,000 of growth.
• Income: is the additional benefit (usually a cash flow) just by owning the asset.
  Example: just by owning share, you are entitled to received dividend money from the company.

Income producing asset vs Growth asset

Based on its characteristic of producing income or growth, each investment that we make through an asset can be classified as “Income producing asset‘ or ‘Growth asset‘. Each asset usually have a little bit of both, but we need to know what to expect in term of this aspect.

For examples:

• If you own a business, say a corner store or a restaurant, you will want this asset to become income producing asset (give you income on daily) rather than growth asset (expect someone to buy it on higher price)
• If you own a property, you will expect it to be growth asset rather than income producing asset. Because usually the money from the rent usually can only cover most part of the mortgage/ home loan (so you cannot enjoy this as income) but you expect the value of the property is growing so that you can sell it or re-value it at later date.
• If you short term share trading (say only a few days or weeks between buy and sell), you expect the asset to be growth asset. You don’t want to wait until the company distribute dividend before selling it.
• If you long term investor (say hold a share more than 1 year): you expect the share to be income producing asset and also growth asset.

Conclusion

So, we know now that if we want to do investing we need to acquire an asset. Then with that asset we either can get the income or the growth. Each assets will have different characteristic on producing the income or growth.