Albert Einstein once said, “Everything should be made as simple as possible, but no simpler.”

The investment industry, however, seems to subscribe to a different motto: “Make things as complicated as possible, and then complicate them a little bit more.” Wall Street salespeople talk about alpha (a good thing) and beta (a bad thing) and gamma (don’t even even ask) and use countless other Greek letters and jargon-filled phrases. It suffices to say that investment people do not put a premium on making themselves understood.

There is, however, one notable exception: a poem – yes, a poem – written eighty years ago by a fellow named John Burr Williams. I mention this ancient and obscure work because Williams’ poem addressed what I believe to be the most important concept in all of investing, the concept of “intrinsic value.”

Here is the poem:

A cow for her milk,
A hen for her eggs,
And a stock, by heck,
For her dividends

An orchard for fruit
Bees for their honey,
And stocks, besides,
For their dividends.

Or, as Williams summarized, “In short, a stock is worth only what you can get out of it.”

My goal here is not to get into the particulars of how to value a stock. That is an important question but a different topic. Rather, it is Williams’ larger observation that is most important: an investment has value only when it produces something. This includes stocks, which produce dividends (or have the potential to do so). It includes bonds, which produce interest, and it includes real estate, which produces rental income.

These investments all have value because of their productive capacity. Just like a cow or a hen or an orchard. For that reason, they are said to have “intrinsic value.” This is important because it means that there is a logical way to assign value to them.

In contrast, many things that Wall Street sells to the investing public fail the litmus test of intrinsic value. Gold, for example, fluctuates wildly in price, as does oil and other commodities. And that is because they do not produce anything – no dividends, no interest, no income of any kind. As a result, they are only worth what the next person will pay for them.

In today’s world, Wall Street has tried to make investment “products” out of virtually everything. As a sensible investor, however, you are usually best served by avoiding this “innovation.” And now you know how to accomplish that: by applying Williams’ test for intrinsic value before you allow anything into your portfolio.

Wall Street doesn’t talk much about Williams’ poem. That’s probably because it’s so simple and straightforward – and doesn’t use any Greek letters. And, that’s exactly why I think it is so important to talk about.