Wealth Matters

Accumulation of collectables the fruit of wealth, not wealth creators


Art, diamonds, gold coins, holiday homes, yachts, private jets, horses, exotic game and many other luxury items are often punted by so-called experts as being the best investment since sliced bread.

It is important to distinguish between experts and investment specialists in the first instance, and then to determine what would be defined as an investment and what not and what the alternatives are.

Investment expert or not?

• Someone flogging bling, the latest car or the oldest classic, the biggest house or apartment is not necessarily wealthy or an investment expert. Wealth is determined by your net asset value (which is quite a personal affair) on your balance sheet that determines whether your assets outweigh your liabilities.

• A wealthy person will not necessarily be able to lead others to wealth.

• Being labelled by the media as an expert on anything does not make anyone an expert, but rather a public figure.

• An impressive curriculum vitae (CV) with loads and loads of academic degrees and diplomas will not grow your wealth.

• People selling you investment products may simply be marketing or sales specialists, and not investment experts.

• Experts in equity, bond, economic, gold, property, art or any other specialist fields may be on top of their focused fields of expertise, but they often lack the broader knowledge of alternatives and do not possess the important investment acumen of understanding the relativity of comparative advantage,

• The fact that someone is a ‘licensed financial advisor’ is no guarantee that that person is also an investment expert.

An investment specialist or expert should be able to have practically free access to reliable data, and be able to combine that with the expertise, knowledge, ability and systems to compare the data of different investment opportunities to determine the comparative relativity of benefit to your short, medium and long term cash flow needs.

What defines an investment?

Warren Buffet, the famously wealthy investment guru says price is what you pay, but value is what you get. This means that an investment should be able to generate cash flow. This can be in the form of interest, rent, dividends, eggs or other offspring.

The re-investment of cash flow eventually leads to compound interest, described by Einstein as the eighth wonder of the world.

This is actually where capital growth comes from. Over periods in excess of 20 years, reinvested cash flow’s compounding effect makes up more than 81% of the total return on an investment.

That means that if you have to sell something, like your art, gold coins, diamonds to create cash flow it is not these commodities that created the cash flow. It was the action or business of selling that created the cash flow and therefore the investment is not the commodity of art, gold coins or diamonds, but the business of trading it that is the investment.

Price increases are a function of internal revenue. If there is no internal revenue, price increases are only a result of inflation (money losing value) and of supply and demand. The latter two functions do not make it an investment without the internal revenue.

To focus on one investment asset class that bears its own fruit may cause you to put all your eggs in one basket. It is therefore important to access specialist knowledge of alternatives available to diversify your risk and to determine where the best relative growth is to be found.

This means that a continuous study of rolling comparative total return tables of asset classes over extended periods is a necessity.

A lucky break to have something of which the price increased astronomically because you were the right person at the right place at the right time is luck. It does not make you an investment expert and the specific commodity an investment.

The collections of wealthy people are not what made them wealthy. They own these collections of art, gold coins, diamonds, horses, yachts, beautiful homes, etc.
because they are wealthy and therefore the collections add to their wealth.                                                                                                                           

                                                                                                                                                                        by Heinrich Kruger

(Heinrich Kruger is the founder and CEO of Kruger International Asset Management. He writes this column in his private capacity.) [email protected]

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