When most people hear the word depreciation they normally think of an accounting term vaguely linked to taxes. While this impression isn’t untrue, the word depreciation has a much greater meaning to investors in tangible assets. Depreciation is simply the gradual and inevitable erosion of value that happens as a physical item wears out over time. This primarily occurs in two ways: first through exposure to the elements and second via mechanical wear. But in either case, depreciation is the mortal enemy of any tangible asset investor.
Houses, boats and cars are all examples of tangible assets that slowly bleed value through depreciation unless money is constantly pumped into them. A house, for example, can give the illusion of gaining in value every year. But this ignores the fact that a homeowner has to inject a substantial amount of money into the structure on an ongoing basis to keep it intact. This usually amounts to somewhere between 1 and 2 percent of its market value per annum. Of course, this amount will vary from house to house. A stone house, all else being equal, will depreciate a bit more slowly than a wooden house due to stone’s higher durability. But even a stone house will eventually decay into a pile of rubble if repairs aren’t made on a regular basis.
The same concept applies to boats where an old adage recognizes the power of depreciation. As the time-honored saying goes, a boat is a hole in the water that the owner keeps throwing money into. If you don’t consistently maintain a boat it will eventually deteriorate to the point where it ends up at the bottom of the harbor. Even very fine and expensive yachts are subject to depreciation. In fact, the larger and pricier the boat the greater the dollar amount of yearly depreciation.
Cars aren’t any different. That 1960’s muscle car might look amazing, but every additional mile that is placed on the odometer lowers the value just a little bit more. It is possible to avoid much of this depreciation if you’re willing to drain the vehicle’s fluids, remove its wheels, put it up on blocks in a garage and never drive it again. But even then the rubber hoses and other soft parts of the car will slowly turn to dust over time. And we’ve ignored the fact that the garage the pampered car sits in will itself slowly depreciate over the years as it sacrifices itself to the elements in order to preserve the prize vehicle.
All this talk of depreciation might sound depressing to someone who wants to invest in tangibles, but there is no need for despair. There are a variety of tangible assets that have either no or only minimal depreciation. Vintage fountain pens, mechanical pocket watches or wristwatches, estate jewelry, ancient or medieval coins, European art medals, antique silverware, objets d’art and medieval illuminated manuscripts are just some examples of tangible assets that experience almost no depreciation. And the storage requirements for these tangible assets are usually modest, requiring only a climate controlled space, like the living area of a house. With a minimum of care, these works of art will survive and appreciate for decades, if not centuries, to come.
