We can define an asset as something that you can touch, fondle if you wish and own. (Since spouses and significant others generally respond to fondling they should NOT be considered assets!)
Examples of assets include, gold, silver, real estate, cars and commodities. Most assets depreciate. If you don’t take care of assets they will depreciate (think neglecting home & car repairs) or time will ravage them (think rotting silos of corn or old cars).
People generally don’t expect assets that they buy, like cars, to appreciate in value. People get confused, however, when assets like gold or real estate go up and mistakenly refer to them as investments. You’re in good company, Buffett makes the same mistake.
Assets are defined as items you can own/hold which in the words of Mr. Buffett “itself isn’t going to do anything for you….it is an entirely different game to buy a lump of something and hope that somebody else pays you more for that lump two years from now than it is to buy something that you expect to produce income for you over time.”
Investments, in contrast have the potential to grow (or shrink) and pay income in the form of dividends based on whether the owner/manager of the companies can create value. Assets like gold and primary residences are non income producing passive lumps with intrinsic value while investments are active vehicles that require skillful management.
Here is a list of assets and their investment counterparts:
You own a home or a bar of gold vs. you invest in a rental property or in Barrick Gold Corporation shares. You have a car vs. you own a taxi as an investment.
You don’t expect to make money from owning a car. Indeed, it is a depreciating asset and an expense. As a rule you should not expect to make money from holding assets. A home can appreciate in value if it is maintained, the neighborhood remains good, jobs are plentiful and interest rates are favorable. Gold can rise in value, through no effort of its own, but in relation to other asset classes like debased currencies.
A great investment, like Buffett’s Coca-Cola will not only pay dividends but appreciate in price, but you can’t hold it. A poor investment can become worthless.
A great asset will retain its value, but won’t produce anything for you. An out of favor or neglected asset can lose value but generally won’t become worthless.
Here is a chart showing how gold has held its value and appreciated against the United State dollar from 2001-2012:
Gold Percent Annual Change vs. US Dollar Year USD 2001 2.50% 2002 24.70% 2003 19.60% 2004 5.20% 2005 18.20% 2006 22.80% 2007 31.40% 2008 5.80% 2009 23.90% 2010 29.80% 2011 10.20% 2012 7.00% Ave. 16.80% Source: GoldMoney
Gold Appreciation from 2000-2012: 487% (Jan 1 2000 $282.05/oz-$1655.50/oz. December 31, 2012) Source: USA Gold
The chart shows that it was better to hold one’s assets from 2000-2012 in gold instead of dollars (which you can also fondle and they won’t respond).
Gold is money, a store of value, a hedge against calamity, debasement, it’s an asset to hold as insurance. The reason gold did so well against the dollar had nothing to do with gold, but rather what the dollar did. It was issued in massive quantities during the period of 2000-2012. The supply of gold is generally constant, subject to mining output.
Median U.S. Home Prices 2000 $169,000 2001 $175,200 2002 $187,600 2003 $195,000 2004 $221,100 2005 $240,900 2006 $246,500 2007 $247,900 2008 $232,100 2009 $216,700 2010 $221,800 2011 $190,000 2012 $211,312 Total appreciation since 2000: 25% Sources: US Census and Zip Realty
The housing chart also shows that from 2000-2012, it was better to own a home than to hold dollars in a bank account and as seen below was also better than owning shares in the S&P 500. This highlights that owning an asset like a home or gold can provide better returns than investing in the stock market. But that doesn’t mean that asset purchases are investments!
Owning a home also provides the benefit of the mortgage interest deduction, whereas there is no credit given for holding dollars other than anemic depositor interest.
The Depreciating Honda Accord
A 2000 Honda Accord bought for about $20,000 can be sold for about $3300 which represents a more than 80% decline in asset value.
In contrast an investment in the S&P 500 on January 3, 2000 would have grown just .5% by December 28, 2012! (S&P @ 1394.46 on 1/3/2000 -S&P @1402 on 12/28/2012.
The prices of assets (gold and real estate) and investments (the S&P) have changed dramatically in 2013 with gold down about 15%, home prices up around 10% and the S&P up around 15% year over year. This changing dynamic raises the issue as to where people should put their money- whether to hold assets or make investments.
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