SuperInvestor Seth Klarman once said that investments are assets that buy goods and services. In other words, they produce cash flow. This undercuts several commodities that consumers usually consider as investments. This includes gold and handbags.
With Klarman's quote in mind, financial advisers call any profitable business or ownership stakes in a profitable business as investments. An example of such an investment is, stocks, as they increase in value over time due to the fact that they are capable of increasing cash flow at a certain point in time.
Again, the price of investments depends on the price that people are ready to pay for them. This means that an investment makes a profit when one party is willing to pay a price that is higher than what another party has paid for the investment. This is what is known as the "greater fool" theory.
Klarman's advice comes into play here. Investors are being advised to buy proper investments that can generate cash flow.
Financial advisers have warned investors against investing in consumer goods like shoes, handbags, baseball cards, and even action figures. Such goods come at a high price and cannot be sold to make a profit.
Financial advisers have also drawn a line when it comes to taking homes as an investment. Generally, people consider real estate as an investment. The fact is that a property becomes an investment only when a property is capable of generating good rental income. An owner-occupied house cannot be considered as an investment since it does not generate any profit or income for the owner. Real estate is, therefore, a speculative investment, and care must be taken when purchasing a property with a goal of using it as an asset.
When it comes to gold, most financial advisers would say that since it is not capable of producing cash flow, it cannot be considered as a real asset. Gold holds value when the economy is strong. The value of gold increases in a strong economy and enables the investor to gain more value from it.
In a crumbling financial system, gold is among the consumer goods that lose value. The same is true for other financial assets. Financial advisers have warned investors against falling prey for the usual thought process that perceives gold as an asset.