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Why The Wealthy Don’t Care About Gold

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Have you ever thought about investing in gold? Many of us realize that if the stock market tanks again (which will most likely happen in 2016) then gold prices will continue to increase in value. So, the question of many is, “Should I invest by purchasing an actual gold bar or by purchasing gold within the market?” If I were asked this question, I would recommend that someone buy actual gold, however, the entire question is actually irrelevant. Not only should you not invest in gold, but you shouldn’t buy silver or nickel or any other precious metal – not if you are investing purely to earn a profit anyway.

The Difference Between a Wealthy Person’s Asset and a Middle-Class Asset

Typically (in the accounting world), an asset is thought to be anything that has a value. So, if you own a house, a car, a gold watch,  a Rubix cube, a diamond ring, or a gold bar, each of these items are typically thought of as assets. Each of them have a value, some more than others, but you could likely receive money for each of these items if you tried to sell them. Therefore, the accounting world and most of the general public would deem these items as assets. I do not.

farmIn the world of accumulating wealth, the term asset has an entirely different meaning. An asset is an item that continually earns you money while you own it. So try to think for a moment about what an asset means to the wealthy. Do they invest all of their money in gold – hoping for a big payday in the future? Well, does gold pay out money while you own it? If I bought a gold bar for $50,000 and put it in my safe in the closet, how much money would come out of that safe while I owned it? None! In order to get my money out of this hunk of metal, I would have to sell it to an interested investor (hopefully for a price that was much more than I paid for it). In an investor’s mind, a bar of gold is more of a liability than an asset because it ties up money, and does not earn any visible money during that stretch of time.

The wealthy believe in assets that may appreciate in value and pay out money while they are owned. Warren Buffett is a master of this. When he was just 14 years old, Warren invested some of his meager savings and bought a pin ball machine. Unlike most kids, though, Warren didn’t put this in his bedroom to play with. Nope, he placed his pinball machine in the local barbershop to earn money for him daily. Already at the young age of 14, Warren knew the definition of a true asset.

As his piggy bank filled up with countless quarters from the barbershop customers, Warren decided to use the money to buy more pinball machines, which then created an even higher monthly income for himself. His assets were making him very wealthy – much more so than a gold bar would have.

The money was piling up for little Warren, so he decided to buy yet another asset – land. He bought open acreage which he then rented out to farmers in the area. Not only did this purchase provide him with cash flow, but the appreciation of land also netted him a nice gain when he decided to sell.

Ignore Gold Prices and Invest in Real Assets

Are you beginning to understand how Warren Buffett became one of the richest men in the world? Instead of buying a big house, nice cars, and other depreciating assets (like the middle-class people do), Warren was buying assets that produced wealth over and over again. My suggestion to you is to not get hung up on gold like the rest of the speculators out there. Instead, focus on purchasing true assets that will earn you a monthly income. This could be in the form of rental properties, land, or a modest business venture. Once you start earning that additional income, you can then reinvest the earnings over and over again, which will soon make you one of the most wealthy people in your area.

Do you plan to invest in any true assets in the future?

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AUTHOR Derek

My name is Derek, and I have my Bachelors Degree in Finance from Grand Valley State University. After graduation, I was not able to find a job that fully utilized my degree, but I still had a passion for Finance! So, I decided to focus my passion in the stock market. I studied Cash Flows, Balance Sheets, and Income Statements, put some money into the market and saw a good return on my investment. As satisfying as this was, I still felt that something was missing. I have a passion for Finance, but I also have a passion for people. If you have a willingness to learn, I will continue to teach.

12 Comments

  1. Am I the first to comment? nice. Yes im planning to invest in a true asset, real estate. I have been looking at different places in my city for a year now and soon to buy one. Passive income is the goal like some of what Warren Buffet did. So when i get old, i would have a lot of retirement options to choose from. Well said about investing in real estate than gold. I agree.

    • I will be starting my real estate search next year, but after reading about Warren’s success with renting out farm land I’ll be keeping my eyes open for that too!

  2. Great article. Very true.

    • Glad you liked it David. It’s amazing what you learn along the way in life. Just 6 months ago I was contemplating whether or not I should buy gold (as an investment that is – I still might be interested in some just as a hedge to a world financial meltdown).

  3. Just a thought here – Step #1 Purchase the land and rent to the farmer real cheap the first year to entice him to actually rent. Step #2 Have the farmer do all the “physical work” to increase property value for free. Step #3 Increase the rent 10% -20% / year This adds up quite nicely over 5 years.

    Remember this doesn’t necessarily have to be farm land – any investment that can net you free labour results in a big savings and increased future revenue. I did this with a house I purchased for rent but didn’t have the time to upgrade:-)

    • That’s a pretty steep increase John. I would think a 5% increase each year would be max. But great idea for sure! Thanks for the comment!

  4. Too true!

    Your house is the classic example of this. Most people consider it an asset. However, lose your job, and start watching your bank account collapse as your mortgage starts sucking it dry, and you will truly feel the difference between an asset and something which generates positive cash flow.

    • You’ve got it Jack! Thanks for the comment!

  5. Great post. So many are caught up in appearing rich when they are really poor. They mistakenly think that the rich have all these toys – cars, boats, multiple houses etc. But those are the ones you see on TV. The real rich live modest lives and could probably buy all of the houses on the block if they wanted to. They don’t need to show their wealth to others. Just having the option to do whatever they want, when they want is happiness to them.

    • Thanks for the comment Don. That is the kind of wealth I would like to produce. The more money I save up, the less I realize that I need or want. At this point, I would just love to have a bunch of experiences and memories. Thankfully, my girlfriend ignores the television like I do and enjoys going outside and making an adventure. Once I earn enough of a passive income, we can do whatever we want! Can’t wait.

  6. Hi Derek,

    I’m a frequent reader but have never commented before – I generally really like the stuff you post, but I do have to respectfully disagree with you on this one. I think it’s definitely a stretch to say that the wealthy are only concerned with purchasing assets that have positive cash flow from day one. A really large proportion of people who obtain wealth do so by investing in projects that don’t make them money at first, but eventually have a substantial payoff. Sure, there’s a big difference between investing for cash flow and investing for growth – but there are many, many people who have become wealthy by taking risks, investing in assets that are underperforming or undervalued, and then eventually realizing some monetary gain from it. I would actually argue the exact opposite when it comes to gold. I’m far from a speculator and I invest for passive income myself, but investing in gold (or similar assets) at the right time is an incredible way to generate wealth.

    My comment is getting ridiculously long (sorry!) but I guess my point is that a good investment isn’t defined by whether or not it produces positive cash flow on day one. It’s defined by how it performs over time, which may mean that it doesn’t produce any income at all, and you eventually sell it for a gain. Just my two cents.

    Love the blog – keep up the good work! Best,

    Dan

    • Hi Dan. Don’t apologize for disagreeing with me. I like the discussion! Hopefully I didn’t mis-speak in my article, but I don’t think an asset has to generate money from day one. Many times, passive income takes months or maybe years to generate before it makes any money at all. But, passive income, even if worked for very hard up front, is much better than a precious metal that only makes you money when you sell it. I would much rather have my money working to make more money that I can use for another investment (instead of just staring at a block of gold for many years). Now, I also believe in investing in gold, but as a hedge against a falling economy. At a maximum, I would put 5% of my investment money toward a precious metal. Do you agree with me here? It actually doesn’t sound like we are too far off. Thanks again for the comment, Dan. 🙂


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