Do You Own Productive Assets?

Baseball Card

When investing, it’s essential to understand if what you’re buying is a productive asset. What does that mean? Well, these assets produce profits or cash, which you can spend or reinvest.

We could analyze any given collection; dolls, glassware, coins, stamps, travel memorabilia. For me, it was baseball cards. As a kid, I spent countless hours watching baseball and loved collecting cards. As it turns out, this was a predecessor to an investing career. I’d try to figure out which players would prove themselves in the major leagues and push their card prices higher. It’s like investing, as we’re trying to pay bargain prices for the great companies of tomorrow.

In this pursuit, I’d spend a few dollars of hard-earned money on packs of cards at the local Five & Dime Store. Many collectors entered the hobby during the 1980s, and card companies responded by printing billions.

Now, as much as I enjoyed looking at the cards, they didn’t do anything. I wasn’t planning on selling them. Their worth was only defined by how much I enjoyed them or what someone would be willing to pay if I decided to sell. Baseball cards are not productive assets.

Fast forward to today—I’ve since donated many of the cards to charity and only kept a few for sentimental reasons. They’re not worth much since I don’t look at them very often, and no one wants to buy them.

Why does this matter? Well, let’s say I spent $1,000 as a kid on this hobby. The value of the collection today would be lucky to top $100. Those cards didn’t do anything except sit in a shoebox for many, many years.

What if I had put that same amount of money in the stock market? I’d have owned businesses that innovated new products, helped their customers, and created profits. Businesses are productive assets. Buying shares of the largest 500 companies in the United States (S&P 500) would have provided a return of over 10% a year. My $1,000 investment would have 27-folded by the end of 2019 and be worth $27,000! While an expensive lesson for me, I hope it helps you determine whether something is productive!

Let’s apply this thinking to another example that we hear about today. Clients sometimes ask whether gold is a good investment. In a nutshell, gold is not a productive asset.

There’s estimated to be 190 tons of gold mined in the history of the world. If we melded that all together, it would form a cube 69 feet on each side that would comfortably fit within a baseball infield. Warren Buffett described gold this way, too, in Berkshire’s 2011 annual report. You can take selfies with it and hug it, but it just sits there collecting dust—not productive!

Instead of that gold cube, you could own all the shares of 95% of the companies in the S&P 500. Those companies produce about $750 BILLION PER YEAR of profit [FactSet financial data and analytics]. Now that’s productive! Which would you rather own?


Disclosures

The information provided is for educational and informational purposes only and does not constitute investment advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell a security. It does not take into account any investor’s particular investment objectives, strategies, tax status, or investment horizon. You should consult your attorney or tax advisor.

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