"Wraps, flips, l/os and other Businesses (long)"
Reply: 1.1
From: Sim' Hampel
Nigel (and Sly),
You are quite correct in that this is indeed a matter of semantics, and also a subjective one.
My personal opinion (and it is only that) is based on your intention when you purchased the asset, and over what timeframe.
To me, an investment is something you are prepared to hold forever (ie. it would become part of your estate and be handed down to your heirs).
If you purchase something that you intend to sell, then that intention to me indicates a desire to trade. By my definition that is no longer an investment, rather you are considering a business venture of trading in properties. The business makes money by buying low and selling high to realise capital gains.
A business venture has different goals and risks than an investment. A business venture has the goal of making money (cash) over a particular timeframe. An investment has the goal of appreciating in value over a long, perhaps infinite time period (ie. until after you are dead).
I will note that I consider it okay to reassess and choose a different path for your asset based on circumstances. This may mean that an investment becomes a trade by my definition.
And just because you sell, doesn't necessarily mean you are trading - it's called portfolio re-evaluation. Weed out the poorly performing assets and reassign the funds to better performing areas.
I suppose that the key issues from my point of view, is that for an investment (by my definition), timing the market becomes largely irrelevant, as over an "infinite" amount of time, market fluctuations mean very little.
For a business venture, where the goal is to maximise the returns over a finite period of time, timing the market is quite relevant and indeed important.
So what do I do ?
Well at this point in time, I have several properties that I consider investments... that is I intend to hold them forever. So far, I have not bought any trading properties. I am developing some tactics for running a business which will involve buying, improving and selling property to generate cashflow to fund the purchase of investment properties.
In answer to some of your questions, Nigel:
Nigel: "So, is it investment if I buy a property and renovate it to increase the rent?"
If you bought it prepared to hold it forever, yes.
Nigel: "What if I decide the market is skyrocketing and sell to reap my cap gain and plough the money into a place with low growth potential but big cashflow? Is that investing?"
That is what I call portfolio re-evaluation. It is capitalising on the growth of one asset and changing the direction of the use of those funds based on current circumstances. Selling one investment to move money into another investment is not trading, it is investing.
Nigel: "Surely buying low and selling high, regardless of the timeframe involved is investing?"
Not by my definition.
I also don't consider spending money on an education as an investment. That is a tactical decision as part of a strategic direction to increase your earning capacity (or your enjoyment of life, or your ability to help others, or whatever you desire to gain from the effort).
You cannot buy education and you do not invest your time, you spend your time. If you learn something then never use it, you will forget it. Knowledge is a depreciating asset. The time spent gaining knowledge is an expenditure, not an investment.
A car can help you earn more money, or gain a better quality of life, or let you help others, or just give you lots of pleasure, but it costs you money to keep one and will not continue to grow in value indefinitely.
Similarly, an education can help you earn more money, or gain a better quality of life, or let you help others, or just give you lots of pleasure, but it costs to receive an education (money and time) and your education will not continue to grow in value indefinitely.
Sly Dog added a few comments: "Obviously you can enhance or protect your investment by taking an active role. This could be renovating or even managing the properties. This simply enhances the investment."
I agree... my definitions revolve around the buying / selling of the asset, not how active you are with the asset itself. Adding value does not stop something from being an investment.
Sly: "Buying something with the intent to sell at a profit has always been 'trading', and not investing no matter what the commodity. I suppose the key is in the word intent."
Hey... I think I agree with you there too Sly ! ;-)
Sly: "Buffet also said, "My ideal investment horizon is forever.""
Amen !
In summary... everything I have said here is my opinion only, and as such is purely subjective. Nigel is correct in that we are to a certain degree playing semantics, but I also agree with Sly's assertion that it also goes beyond semantics and into mindset. Now that is a topic we could discuss for hours... the psychology of investors and traders ! Maybe some other time.