Feed, Sleep, Bleed: What category is your investments?
Here's some old school RUN DMC for you:
Hard times spreading just like the flu
Watch out homeboy, don't let it catch you
P-p-p-prices go up, don't let your pocket go down
When you got short money you're stuck on the ground
Turn around, get ready, keep your eye on the clock
And be on point for the future shock
I remember spitting those rhymes without a care in the world in probably seventh grade. And now, the prophecy is upon us.
Which brings me to discussing investments. What's investment do you have in your pocket? don't let your pocket go down
I think of investments in 3 categories.
FEED
SLEEP
BLEED
Is a refrigerator as an investment? It can be any of the three categories.
FEED
A refrigerator can FEED, that is, provide an ongoing return. For example, I know someone that works in the the tree seedling industry. Once a year, seedlings are harvested and stored in a large refrigerator for a few weeks until distributed to foresters. For the other 45 weeks of the year, the company rents the commercial refrigerator to farmers who need seasonal cold storage. So, for 45 weeks each year, the refrigerator is FEEDING the company with cash from rent.
Investments that feed include stocks with dividends; bonds; bank savings accounts; rental property; annuities, and staked crypto. Splinterlands cards are FEED investments.
SLEEP
So, can the refrigerator be a different type of investment? Sure SLEEP.
My little blue fridge is in the sleep category of investments. It has classic styling and yet it is energy efficient. I bought it a few years ago. I am holding it for when the market on dorm size fridges are at the peak. Typically, that's in the Fall, when kids go to college. Originally, I bought it in Spring to resale in a few months, but then a pandemic shutdown the demand as college students stayed home.
SLEEP investments don't have a periodic payout like FEED. There's no rent this fridge earns. No one pays dividends on it. It's just resting until the market is willing to pay more than I paid for it.
I watched American Pickers, that's a show about antique hunters. The pickers were trying to low ball on an old carnival ride/equipment. The owner looked at them and said "Iron don't eat." When investments SLEEP, they don't cost the owner anything to hold the investment. In reality, there are very few truly SLEEP investments. Stocks without dividends, unstaked crypto, gold, art, postage stamps, and antiques can all be SLEEP investments.
BLEED
So what's the third category of investments, and is baby blue fridge one? That's the bleeders. BLEED is an investment that has an ongoing cost. If I plug in the refrigerator, it will cost me electricity each month, and if I use it, it will bleed value.
BLEED investments are not bad, but they are risky. A prime example is real estate. Some people think of real estate, like raw land, as SLEEP. But it's not because of property taxes. Rental property can be more BLEED than FEED, like when the property is vacant; or the cost of taxes and insurance are greater than the rent.
I remember talking to a rancher who was selling cattle at auction and losing money. I asked him "Why?." He said, "I got to stop the bleeding." Cattle eat. Everyday, lots of corn, grass, minerals and medicine. Holding cattle was bleeding the rancher dry. Property purchased on loan is similar. A Fix and Flip is great unless the home lingers on market too long. The interest payments bleed away all the profit. I love classic cars, but they bleed insurance and maintenance expense, and sometimes transmission fluid...
So we make a pretty big loop to get back to Run DMC and the forthcoming hard times. And you may wonder what I advise I have for you?
If the investment in your pocket FEEDs, let it be. Don't fret too much about the underlying valuation of the dividend paying stock. Markets rise and fall. Stack the returns or spend them.
If the investment in your pocket is aSLEEP. Let it be. Find something else to sell if you need cash or pick up a second job. The market will reward you in the future. There will be a freshman in the fall that needs my fridge!
If the investment in you pocket BLEEDs, Watch it closely. When it bleeds too much, sell it. Costs that are reoccurring require constant review. An empty barn costs the rancher much less than a barn full of cattle. Stop the bleeding. And buy the BLEEDERS when they produce more than they cost.
All photos and content are the creation of Methodofmad
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Interesting twist on Good, Bad and Ugly. I like it.
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Thank you!
What are your thoughts that some assets in the SLEEP category may be better classified as BLEED in reality when you consider inflation? When the expected real return is negative?
Or when there is depreciation/ amortization involved (like keeping a generic car and not use it, or a piece of technology that will become outdated)
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Thank you for the comment. I agree and I probably should have a term like CREEP, because there is a tendency for some assets to creep from one category to the other. You are correct about what could move an asset from one category to another. I used the example of the refrigerator as a SLEEP, but another similar item like a Laptop would be a good example based on your comment. If I purchased 20 laptops in Spring with the intent to resale in Fall, I could have an asset that lost value due to newer models and better technology during my hold time. SLEEP assets are pretty hard to hold because they are sometimes difficult to value and the value may decline due to unexpected changes in consumer appetite or needs. Most NFTs are in the SLEEP category in my mind (excluding NFTs that can be rented like Splinterlands). The NFT pays no dividends, it cost nothing to hold, and the end goal is that it appreciates over time. Tangible assets held in SLEEP do have a risk of sliding into BLEED, or being put into some sort of service to generate income in FEED, for example, the generic car being used as a Uber vehicle.
lol, creep.
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Right, I was thinking that some sleep investments are really slow bleeds.
Like, "Iron don't eat" but it sure does take up space.
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This was really insightful, yet simple. Very nice post!
I guess another relevant aspect is the longevity of the asset. Would you expect it to disappear after a year, 10 years, 30 years, 100 years?
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Longevity is important. Since FEED pays a dividend, I usually think about when does the asset return all of the original investment; and what value will the asset have at that point? For example, my return on Splinterlands cards as rentals is about 60 percent. So in two years, I should have all of the initial investment returned to me with a slight profit. If the underlying asset is worth the same as the original purchase, then I am in a great position, if the value is less, I still made a small profit. If the rate of return is low, like 2 percent, then I prefer an asset that is most likely to hold all of its original value or appreciate, such as a blue chip stock.
On Sleep, then longevity is important in consideration of loss of use. If I hold the refrigerator for two years, could I have used the same capital during that period for a better return elsewhere? I refer to this as an opportunity cost. In general, art and antiques work well in SLEEP. I enjoy owning either one, so I do not worry about the opportunity cost. And since both should appreciate well over time, the long term hold is worthwhile.
In Bleed, longevity is very important. The more the asset eats each month, the faster it must be disposed. Non-revenue generating real estate is a very good example. Raw land costs property tax each year. In addition, if it is purchased with borrowed money, then there is an interest cost each month. The property must be able to be resold for more than the aggregate of these cost, the purchase cost and a profit margin. In real estate, I recommend that the buyer has a solid plan for selling the property before ever purchasing it. Best of luck investing and thanks for the comment!
I love this. I think a lot of our investments are bleeding right now though lol
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Interesting categories and as basic as you can get.
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These categories depend a lot on location and a bunch of other factors...
Your refrigerator would have been a possible BLEED in very humid areas. It would have developed rust and wouldn't be as pretty as it was the first day you got it.
Land is a SLEEP where I come from because no one pays property tax unless it's an actual building that generates revenue. Homes don't pay that tax.
There's a twist... But I love the analogy. It works for everything.
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You are correct. Location of the asset can make a difference for the category. I should be looking for land where you live as a good SLEEP investment! I think in general land is a very solid investment, but everything is situational. I appreciate the comment!
Thank you for more knowledge about investment. really really love your post
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Thank you. Most of my failures and bad investments were because of poor planning. In fact, some of them would have been great investments, but I had not planned my exit or I had to exit sooner than I should have because I needed the money for something else. Now, when I invest, I ask myself what is the goal and what is the timetable.
Good advice. Thanks.
ListNerds brought me here.
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Thanks for letting me know that @listnerds was the referral. I am just starting to use Listnerds and so far the response is very good.
I came cause of listnerds too.
Finding leofinance articles on listnerds is my favorite.
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Thank you for this article.
I have gained a new perspective at looking at my investments.
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STOPThis is a great way to evaluate investments. Thanks for the summary. !BBH
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Because this is such an awesome post, here is a BBH Tip for you.
. Keep up the fantastic work
thx for this good information... i have fun with reading.