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How to select assets promising good profits: Kiyosaki & Buffett style

According to some investment gurus, the definition of an asset varies while considering two different subjects or disciplines.

In professional finance and accounting, an asset is any property, movable or immovable, owned by you or in your possession, whether in your direct use or given out on rent.

Robert Kiyosaki’s views about assets & liabilities

 Robert Kiyosaki, an ace investor/ famous financial trainer, however, believes that in the field of investing, an asset is something that puts money in your pocket, and a liability is something that takes money out of your pocket.

 In his famous book Rich Dad, Poor Dad, and his financial training sessions, he explains the concept of assets and liabilities in detail.

According to Robert Kiyosaki, the house in which you live is not an asset for you. It is a liability as it causes money to flow out of your pocket. It may, however, be considered an asset by your bank as it receives mortgage payments.

 However, a house on rent is an asset for you as it puts rental money in your pocket. Likewise, a car in your use is a liability while one rented out is an asset.

(It in no way means that you never buy a house or a vehicle for personal use. However, it is not an investment. It is merely a purchase of a property item needed by you. What Kiyosaki means is to avoid the purchase of redundant immovable or immovable property as it can result in an excessive cash outflow and limit funds available for saving and investment.)

Billionaire Investor Warren Buffett’s style of investible assets selection

 He believes an investible asset is one which acts as a continuous source of cash inflow. It should be able to produce a regular stream of passive income (also known as an income-producing or income-generating asset).

 He thinks stocks, mutual funds, bonds, and farmlands are good income-producing assets. They give returns in the form of dividends, interests, or profits, as well as have the potential to appreciate in the long-term. 

Although gold gives good capital gains in the form of appreciation in price in the long-term, it doesn’t fall in the category of an income-producing asset. That’s why Buffett hasn’t liked gold as an investible asset in the past. (Recently, there has been news that indicates his inclination towards gold.)

In the past several decades, Buffett had been skeptical of investment in stocks of technology/ IT-related companies, as he considered them virtual and not backed by real assets. (Lately, he has shown some flexibility and chosen only a few high-value tech companies for investment.)

Another asset Warren Buffett is wary of for investment is a cryptocurrency like bitcoin. Apart from not being an income-generating asset, it is speculative and virtual. He believes investible assets should be physical/ real or must have backing by a brick and mortar company or a secure financial institution.

How to evaluate investible assets: Good, bad and neutral assets from an investment point of view

Valuable views of eminent investors on the selection of assets suitable for investing has led me to examine asset classes in detail and classify them into the following three categories:-

  • Good Assets
  • Bad Assets
  • Neutral Assets

Good Assets:-

All income-generating assets are good assets. These provide a regular stream of passive income or a continuous flow of money into the pocket of the investor. Investors receive income quarterly, six-monthly, or at least yearly.

 Stocks (non-speculative and backed by real/ brick & mortar companies), mutual funds, bonds, fixed-term bank deposits, rental property (residential & commercial), car rental, and agricultural lands/ farms all fall in the group of good/ investible assets.

 In addition to cash inflows, their prospect of long-term appreciation in value offers wealth creation in the form of realized capital gains. It is the icing on the cake. Investment in such good assets is like buying a cow. You enjoy its milk (income/ dividends) as well as see it grow in size over the years (capital gains).

Bad Assets:-

Speculative and virtual stocks (not backed by a brick & mortar/ physical company or a strong financial institution), and any financial instrument not backed by a physical/ real asset are bad assets for investment.

A second (redundant) house bought for personal use (and not rented out) is a bad asset. Likewise, additional cars over and above your requirement kept for personal use are also bad assets.

These will take money out of your pocket (for maintenance, repairs, servicing, operations, utility bills payment, or mortgage payments) instead of putting income in your pocket.

Neutral Assets:-

 They are neither good nor bad for investing: not good because they don’t produce any yield or passive income, and not bad because they appreciate in the long term and become a source of wealth creation once sold at a much higher price.

 Examples of this category are; gold, jewelry, gemstones, antique paintings, and other valuable artifacts.  Plot/ land not in use also falls in this group. It is like buying a bull (in contrast to buying a cow in case of ‘good’ assets.)  A bull will not give you any service.  You can only see it appreciate in size and value until you sell it at a higher price after several years and benefit from realized capital gain.

Final Word for investors:-

Always invest in good assets to enjoy profit income, capital gains as well as capital preservation (as these assets are real/ physical or backed by large corporations or sound financial institutions/ banks and have limited chances of fraud or bankruptcy).

Never invest in bad assets as instead of putting money in your pocket, these assets will keep draining your money. Avoid speculative trading in disreputable companies as it may cause a complete capital loss.

Be very careful in selecting neutral assets for investment.   Don’t block too much money in these to avoid an “asset rich, cash poor” situation. Investment in gold should not exceed 5-10% of the total investment capital.

Disclaimer: This is only a personal analysis of the author based on the views of renowned investors. All investments are subject to market risk, and returns/ capital preservation cannot be guaranteed. The author is not responsible for any loss incurred by investors based on the views presented in this article. Investors to consult personal wealth/ asset management companies for expert advice on asset allocation, portfolio management, and other aspects related to investments.

Post Author: Kamran Mahmood

The author is a seasoned financial investor and a prolific writer on matters related to stock exchanges, capital markets, wealth creation, and asset management. He keeps a keen eye on the global macroeconomy, financial world, personal wealth management, and investment opportunities.

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