Investing Basics
An asset that pays nothing can only be valued by what someone else will pay
Holdings that produce no income have no stream to discount, which means their price rests entirely on what the next buyer thinks, and that is a different proposition from owning something productive.
By Aditya Ramaswamy3 min read
Two categories that get discussed as one
Some holdings produce something while you own them. A business earns, a loan pays interest, a let property collects rent. Others produce nothing at all: a metal in a vault, a currency, a collectible, a digital token. Both can rise in price, and only one of them has a stream attached.
The distinction is not about respectability. It is about what the price can be anchored to. Where there is a stream of payments, there is at least a defensible way of asking what the holding is worth, by considering the size of the stream and how certain it is.
Where there is no stream, that entire method is unavailable. The value rests on what somebody else will pay, which rests in turn on what they think somebody after them will pay, and so on. That is not a criticism, but it is a different kind of proposition.
Productive assets have a floor made of arithmetic
A share of a business that earns money has a value that can be argued about with numbers. So does a loan, and so does a property that collects rent. The arguments may be wrong and the numbers uncertain, but there is something to argue about.
That anchor is what allows a holding to become obviously cheap. When the price of something productive falls far enough relative to what it produces, the return available to a new buyer rises, and that mechanism eventually attracts buyers.
Non-productive holdings have no such mechanism. A price that has halved is not thereby offering anything more than it was before, because it was never offering a stream in the first place. It is simply cheaper, which is only meaningful if someone else agrees.
Which is not to say they do nothing
Assets without a yield can still serve a purpose in a portfolio, and it is worth being fair about this. Some are held because they have historically behaved differently from other assets, which can reduce how much a whole portfolio moves together. Some are held as a hedge against particular scenarios.
A currency held for a known future expense in that currency is doing an entirely sensible job and produces nothing while it does it. A commodity held by someone who will actually use it is likewise doing something real.
The reasoning becomes weaker when the only argument for holding something is that its price has been rising, since that argument is indistinguishable from the argument that will be made at every point up to and including the top.
It is also worth separating scarcity from value. A thing being rare tells you how much of it exists and nothing at all about how many people want it, and plenty of genuinely scarce objects have no market to speak of.
Costs run in the wrong direction
A productive holding pays you while you wait, which means time is broadly on the owner’s side. A non-productive holding frequently charges you while you wait, through storage, custody, insurance or platform fees, which means time runs against you.
That asymmetry matters over long periods. Something that costs a little each year to hold must rise in price simply to break even, and the required rise compounds in exactly the way charges do everywhere else.
It also changes the psychology of holding through a bad stretch. An owner of something that pays income receives evidence that the holding is doing something during a period when the price is unhelpful. An owner of something that pays nothing receives only the price.
Naming the position honestly
The useful discipline is to say plainly which kind of thing you are holding and why. Buying a claim on future earnings is an investment in the ordinary sense. Buying something in the expectation that its price will rise, with no stream attached, is a different activity, and it is not made respectable or disreputable by the label.
What it does affect is sizing. A position whose value depends entirely on the opinion of future buyers has a wider range of possible outcomes, including outcomes near zero, and that argues for it being a proportion of a portfolio a household could lose without consequence.
Whether any of this belongs in a particular portfolio depends on circumstances that no general article can see, and some of these holdings are lightly regulated or not regulated at all in some jurisdictions. Anything of size is a matter for a regulated adviser, and the absence of a stream is a fact to establish before rather than after committing money.
Common questions
Does an asset need to produce income to be worth holding?
No, but the reason for holding it has to be something other than a valuation based on what it produces. Behaving differently from the rest of a portfolio, or covering a specific future need, are coherent reasons; a rising price on its own is not a valuation.
Why is a non-productive asset harder to value?
Because there is no stream of payments to weigh against the price. With a productive holding you can ask what it earns and how reliably; without one, the only input is what the next buyer will pay, which cannot be established except by asking them.
What is the practical difference in how the two behave?
Productive holdings tend to pay you while you wait and become mechanically more attractive as their prices fall relative to what they produce. Non-productive holdings often cost something to hold and gain no such mechanical support when their prices fall.
Aditya covers spending, saving, debt and the questions readers actually send in and thinks most subjects are more interesting once you know how they work.
