Before we define what Value Investing is we need to define what is an asset first. Understanding these fundamentals will enable us to build a foundational understanding of how Warren Buffet invests so that we may replicate how to invest using his strategies.
An asset is considered to be something that continuously puts money into your pocket. Usually it is something that generates money passively.
For example, your job isn’t an asset because you need to work that job in order to generate the money. For instance, a plumber who works for a plumbing company. He or she needs to work to get a paycheck therefor the job isn’t considered an asset. But if you own or invest in a plumbing company, and it’s sustainable and profitable, it is an asset for you.
To illustrate this further we’ll determine whether the following are assets or liabilities:
Cars are liabilities because it depreciates in value (taking money out of your pocket).
Your house that you live in is a liability. It takes money out of your pocket. Some people consider your house an asset because it usually appreciates in value. Houses do appreciate in value but it is usually due to inflation or speculation that it will appreciate, therefore it is not a true asset.
An investment property, such as a single family home or an apartment is an asset. Unlike your own personal house, a property that you rent out puts money into your pocket therefore it is an asset.
If you own a patent it can be considered as an asset. You could license out your intellectual property and generate income from it making it an asset.
Stocks are typically considered to be assets. But it depends what is being done with the stocks. If stocks are being used to traded in hopes of buying and reselling them for higher prices, that is speculating (value trading). A value trader needs to work to arbitrage stocks and make profits in doing so. In this case a stock truly isn’t an asset.
If stocks are bought in the intent of investing in the company that it represents, then the stock can be considered an asset. We’ll define what stocks truly are in a later segment.
As a Value Investor you want to allocate your money into assets, things that put money into your pocket rather than take money out of your pocket (liabilities).
Stay tuned and we’ll continue to layout the foundations of what makes a Warren Buffett-style value investor.
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