I was listening to the podcast of two of my favorite financial commentators several weeks ago when they made an offhand comment that slowly painted a picture in my mind.
They said something about there being two types of investors in the world. Some people buy assets to produce money so that they can buy more assets. Others amass money so they can buy assets that they hope will produce more money.
As I thought about the comment, it struck me that they were describing a musical chairs kind of situation. And I formulated a question: As you approach investing, do you think of money as being the “chair” . . . or cash-flowing assets as being the “chair”?
What’s Your Chair?
With which do you feel safer? When your personal financial “music” stops, where would you rather find yourself: sitting in cash . . . or in cash-flowing assets?
I realized that I was raised to think about and to value cash in preference to the (primarily financial) assets I purchased. I was taught to look at the market value of the assets (stocks, bonds, mutual funds, and money market and bank accounts)—how many dollars I might get if I sold them. were means to acquire more cash value (if sold) and/or to hold more cash. Period. Cash was the goal.
Anything I purchased, I bought solely for the purpose of acquiring more cash (if sold) than what I spent when I bought it, and/or I put money into the (account—bank or money market) solely for the purpose of holding more cash and, hopefully, getting enough interest to cover inflation. Period. End of story.
Cash was the goal.
I was taught to look at my personal balance sheet, my net worth statement—the total dollar value I could acquire if I sold everything. That was what I considered important. As long as my totals kept growing . . . and as long as I eventually made the pile big enough, then I would be “safe.” I would be sitting in a chair.
So cash was my “chair.”
Or Cash-Flowing Assets?
But in the last couple of years, I have adopted a different view. I am far more interested in cash-flowing assets than I am in the cash itself.
My assets can be turned into cash if I sell them. And, of course, if I sell them, they will always produce some number for the balance sheet or net worth statement. But I really don’t care anymore about those things. As I have quoted Bennett Stewart in the past,
Accounting rules create balance sheets that . . . show the value that might be realized in a salvage sale. . . . But . . . [a]s shareholders, . . . we are chiefly concerned with the company’s . . . value as a going-concern business enterprise.1
And I’ve found that to be true . . . if I’m investing in quality assets. I’d rather own the assets any day rather than the cash they will give me if I sell them.
At this point, I realize I was taught as a young man to look for golden eggs; but now I’m looking for the geese that lay the eggs.