Tangibility: An Investment Quality?

June 17th, 2011 by Potato

What makes a good investment? I would say we can all agree on a definition along the lines of something that will be worth more in the future, finding some balance between maximizing return while minimizing the risk of loss.

There’s lots of room for discussion about which asset classes best meet those definitions, how to go about finding them, and how to balance the potential returns with the risks.

But, is the ability to touch an investment a quality that makes for a good investment? I’ve heard many times about how real estate is an attractive investment because it’s tangible. Yet I’m left wondering, how does being able to touch it make it improve my future returns? Maybe it can be seen to reduce the risk of loss since it’s unlikely to be worth nothing in the future (313 excepted), but a liberal sprinkling of leverage eliminates that benefit.

And of course the grand counter-example: was real estate in the US in 2006 a good investment (hint: the answer is no). Was it any less tangible though?

I’ve heard that about gold now, too. I’ve got a 1-oz silver coin here. There, I just touched it. I don’t think that helped the value any. Indeed, I also have some cash, and having it here in my wallet so I can touch it makes it a worse investment than making it intangible in a HISA.

Tangibility can play into the importance of understanding an investment, but really comes down to satisfying an emotional need. Being able to touch your investment, to sit under its roof, to improve it with your own hands, or to clutch it tight and whisper “my precious” can make you feel better, but it doesn’t make it a better investment. And as we’ve learned so many times already, emotions are best left at the door in investing.

One Response to “Tangibility: An Investment Quality?”

  1. Financial Uproar » Saturday Morning Dump: Taking A Link Says:

    […] Blessed By The Potato has a great piece on tangibility and whether it’s important to invest in only tangible assets. When I look at balance sheets, I often will discount a company with lots of intangible assets. Should I be doing it? […]