Investing for value or income?

There are two primary economic reasons for acquiring an asset. One is value and the other is income. We may wish to preserve or enhance value by acquiring an asset like land. We may also acquire an asset to generate income like business assets or rentals for instance. We may also acquire assets for non economic reasons like pride, status, peer pressure, etc.

Investing for value is good for long term prospects where the returns are not urgently required. It usually requires a lump sum investment like in the case of land. The main downside is that for some assets you will have to liquidate them to realize the value. If you want to realize value from land you have to sell it and in the process lose the asset. More funds might be required to develop the asset to generate an income. When investing for value make sure the price you pay is much lower than the value you immediately obtain.

Investing for income or cash flow applies to most business assets, some financial assets like treasury bills, and things like rentals. In this case income is generated on a regular or even daily basis. This mode of investing is appealing as some money is taken off the table in a short time reducing the risk of investment. The cash flows generated will also provide a livelihood to the investor or business owner. The surplus cash can be reinvested in other ventures.

We can also acquire an asset for non economic reasons like pride, self actualization, spiritual concerns, interest, moral/ethical reasons, etc. This is the case when you buy the plot next to your home when it becomes available for sale whatever the price. Or when you acquire an estate for environmental concerns.

Now the real magic lies in acquiring an asset which increases in value, generates an income, and is dear to your heart. For instance if you buy shares in a company which produces life saving drugs for children, you may get dividends and the share price might go up. So you help to save lives, increase your wealth and get dividends all at the same time. If you’re able to do this frequently over a long period of time you’ll end up truly wealthy.

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