Evaluate Investments by Their Potential Income, Not by Their Own Value
How you think about your investments will determine what you invest in. Instead of investing in something that you think has intrinsic “value,” ask yourself how much money you are likely to make from it.
Personal finance blog Kapitalust explains this subtle topic with an example of a rented apartment. A condominium is probably considered a valuable asset because it is expensive to buy. The same can be said for a house, a car, a stock, or anything else that you might consider an investment. However, if you lose more money on it than you can get back, it is not an investment at all, regardless of its perceived value:
Your job as an investor is to determine if the cash flow that the asset will generate for you is worth the current starting price of ownership. The price you pay completely determines the profit you receive. If you overpay, you will make a dismal profit. If you can get a great deal, you will make fantastic profits. Always ask yourself “at what price and on what terms?”
You can also think of this concept as a monopoly. When you buy an in-game property, it has little intrinsic value beyond the purchase price (as opposed to a home that you can value because it is beautiful and in a good location). But you don’t buy things just because they are. You buy it so that others will pay you money. Ultimately, every attachment should be treated this way. Don’t buy something just because it now looks like it’s worth something. Ask yourself if this will bring in more money or value over time than it will cost you.
Renting an apartment as an example of the only way to think about an asset | Capitalust via Rockstar Finance