I was recently listening to the Berkshire Hathaway annual conference addressed by Warren Buffet and Charlie Munger. This was being beamed live via Yahoo.
In this Yahoo presentation before the conference began they had some of their correspondents check out the people who had cone and then one of the correspondents also did a small interview with Warren Buffet. One of the questions he asked was – what Warren thought about Bitcoins and cryptocurrencies. This question kind of has stayed with me because this was something which I myself was not clear for a long time and then a lot of people have asked me.
As is usual of Warren Buffet he gave a very simple explanation for what is an investment and what is trading. This is something which I found very useful and I thought of sharing.
For him cryptocurrency is not a investment because the cryptocurrency has value only in the eyes of the next person who wants to buy it so it’s a commodity for trading and if someone is willing to pay higher price you gamble on that.
Unlike trading an investment is an instrument of some kind which earns on its own even if there is no one to come and buy it from you… so if you buy farmland in your village and even if the next person is not willing to buy it from you at a higher price, at the farm you can still grow crops and have cattle etc. …. Same would be the case in terms of investment in equity…or for that matter even buying a cow can be an investment and the milk can be sold
So if you are wanting to do an investment keep this fundamental concept in mind …..will this item earn for you irrespective of somebody wanting that item or not.….if you buy foodgrains with the thought that somebody will buy it from you at a higher price then that is trading. On its own foodgrains will not grow more foodgrains for you
So your house for your own living is not an investment – which is something I had written earlier also is a bad idea, but a house which you buy to rent out to generate passive income is an investment and therefore a good investment
Equity purchase of a company which manufacturers or makes something is an investment because the company will continue to produce its goods irrespective of whether someone else comes and buys that equity from us or not
People become financially free when they make investments. These investments earn for them and compounding grows the earnings multiple times over. The longer the runway – as Mohnish Pabrai puts it – for compounding to play its part the more wealth you create.
Till next time….when you are in a dilema…think very simply ….will it earn for me irrespective whether the other person wants it or not.