The reason why so many people fail at the investment game, even very sadly, is none other than because they do not understand the rules of the game when they play it. Obviously, you can’t win the game if you break the rules. However, before you can avoid breaking the rules, you need to know the rules. Another reason people don’t know how to invest is that they play the game without understanding what the game is about. That’s why it’s important to explain what “investing” means. What is an investment? An investment is a value that produces a return. Every word in the definition should be considered because it is important to understand what investment really is.
As you can see from the above definition, there are two basic characteristics of an investment. Every piece of property, possession or asset (yours) must meet these two conditions in order to be (or become) an investment. Otherwise, it becomes something other than an investment. The first characteristic of an investment is that it is valuable – something very useful or important. Therefore, any valueless possession, property, or object (yours) is not and cannot be an investment. By the standards of this definition, valueless, useless, or insignificant possessions, property, or assets are not investments. Every investment has a value, which can be determined in monetary terms. In other words, every investment has a monetary value.
The second characteristic of an investment is that it must not only have a value, but it must also have an income. This means that it must be able to make money for the owner, or at least help the owner in the process of making money. Every investment has the ability, commitment, responsibility, and function to create wealth. This is an integral part of the investment. Any property, possession or asset that does not generate income for the owner, or at least does not help the owner generate income, regardless of its value or worth, is not and cannot be an investment. In addition, any property that does not perform these financial functions is not an investment, regardless of its cost or value.
There is another characteristic of investing that is very closely related to the second characteristic above, and you should remember it very carefully. This can also help you understand whether the price is worth investing in. Strictly speaking, an investment that does not make money, or does not help generate income, saves money. Such an investment does not put money in the investor’s pocket, but it saves the owner some money that he would have spent in his absence. In this way, although it is not strictly an investment, it creates money for the owner. In other words, an investment always fulfills the function of wealth creation for the owner/investor.
In general, to qualify as an investment, any valuable investment, in addition to being very useful and important, must have the ability to generate income or save money for the owner. It is very important to emphasize the second characteristic of an investment (i.e., that it is a source of income). This is so because most people only consider the first signal when determining what an investment is. They think that an investment is only valuable, even if it is profitable. This misconception usually has serious long-term financial implications. These people often make costly financial mistakes that cost them dearly in life.
One reason for this misconception may be that it is acceptable in academia. In the financial studies of traditional educational institutions and academic journals, investments – also known as assets – are referred to as values or property. Thus, business organizations consider all of their valuables and property to be their assets, even if they do not receive any income from them. This notion of investment is unacceptable to anyone familiar with finances because it is not only wrong, but also misleading and deceptive. That’s why some organizations knowingly fail to treat their obligations as assets. It is also why some people also view their liabilities as their assets.
Unfortunately, many people, especially those who are financially ignorant, consider as investments values that consume their income, but do not generate any income for themselves. These people put the value of their depleted income on their list of investments. People who do this are financially illiterate. As a result, they have no future in the financial industry. The income-generating value, as the financially literate people call it, is an investment in the eyes of the financially illiterate. This shows the difference in perception, reasoning, and mentality between the financially literate and the non-financially literate and the non-financially illiterate. This is why people who are financially literate have a future in finance, while illiterate people do not.
According to the definition above, the first thing to consider when investing is “what is the value of what you want to buy with your money as an investment”. All other things being equal, the higher the value, the more attractive the investment (even though it may be more expensive). The second factor is, “How much will you get for your money? If it is a valuable but unprofitable investment, then it is not (and cannot be) an investment, and there is no need to say that it can only be profitable if it is valuable. Therefore, if you cannot answer these two questions in the affirmative, then what you do is not an investment, and what you gain is not an investment. At best, you can gain responsibility.