Money Track 2: Investor
56Money Making - The Investor Track
As promised, I will now write about the second track of generating income, the investor path. As usual, I will start the first paragraph by giving my own interpretation of the word investor and I will discuss some of the advantages and disadvantages of taking the second path.
An investor is simply someone who owns the means or factors of production. In economic terms, there are 4 types of production factors: labor, capital (see, I told you that you will need some mullah, didn't I), land and entrepreneurship. As an investor, you own these factors of production and you set them up so that they could generate income for you. In that way, you do not need to trade your time for money. I will explain each of these factors in detail. Labor. Let's play a game of Lemonade Tycoon, shall we? So, you set up a Mickey Mouse lemonade stand and sell lemonades at $1 a pop. For simplicity, we assume that you make $0.50 profit on each cup of lemonade you sold. And we will further assume that you sell 300 cups everyday for a profit of $150. Now, you can spend 8 hours selling lemonades and get $150. That makes you a self-employed person. On the other hand, you can hire an employee for $8.00 an hour to do the same job. Now that you have an employee, you are an investor because you have one factor of production. Yes, you earn less but you can use the time not spent on selling Mickey Mouse lemonades with your family. Capital. A good example would be bonds and savings accounts. You have money and you lend the money to banks or Uncle Sam. In return, they pay you a fixed amount of interest every year. So, you are putting your money to work in order for you to make more money. Land. Rental properties would be a good example. You own some rental properties and you rent it out to collect rental income. Entrepreneurship. It generally refers to your management skills and how good you are in managing the resources you have but I would like to extend it to cover novel ideas and inventions as well because new creations or ideas are also means of production since you get to do the licensing/patenting business or simply write a book to generate royalties. There are also two classes of investors, passive and active. Active investors are usually business owners cum CEOs who make important day to day decisions to improve their business or investments. On the other hand, passive investors are angel investors or venture capitalists who contribute money to own equity in a firm (again, firms are just a combination of various factors of production) but they do not take part in the day to day operation. They just own the means of production. Now, yiou might ask: What about me, the common stock owner...? I will explain this in the following paragraph.
Related hub: Trading
 | Amazon Price: $18.99 |
 | Amazon Price: $10.16 List Price: $22.99 |
 | Amazon Price: $5.99 List Price: $0.25 |
 | Amazon Price: $32.92 List Price: $30.00 |
Ok..so you are the stock holder of a company? Let's see if I can clarify this. There are basically 2 schools of thought regarding stock ownership. The first school is value investing, advocated by Ben Graham in his book "The Intelligent Investor" and Warren Buffet. And the second school is advocated by Robert Dennis, the turtle trader guru. For the former, you are buying a business (again, another factor of production)!! Congratulations! That makes you an investor!! Your main source of profit would be the dividend payouts of the company. You buy the stock because you believe the company has value and it has future growth potentials. Say, you bought 50% equity in a private company for $100000. The company goes public and your 50% is now worth $10 million. So, your dividend payouts would be fatter. Because you are part of the company, you do not care whether the stock price is going up or down because you trust the company and you believe that it is going to do well in the long run. No dividends? No problem because your book value/net worth is growing, at least on paper! I will leave the second school of thought for my next hub because it is NOT INVESTING!!
Now, can you invest in the same stocks as Warren Buffet? Yes! Can you be as rich as Buffet? Maybe yes but 99.9% of the time, NO! The common investor is DIFFERENT from Warren Buffet. Always keep that in mind. Buffet buys 9% stake in a company and you buy 9 stocks...Buffet has voting rights in the company, even to the extent of changing the management team but you do not...Buffet owns Geico insurance and he can use the insurance premium to acquire other businesses but do you, the common investor, has that kind of privilege...Buffet publishes his portfolio in his annual statement and you rush to buy the same stocks but little do you know that Berkshire Hathaway is making her next move while you are chasing old fad...stuff in his annual statement is yesterday's news to BRK/A and BRK/B! Buffett has $30 billion and you have, oh, $3000 to invest...duh!!
Alright, I guess I have provided you with a good explanation of what an investor is. Now let's move on to the pro's and con's. The biggest advantage of having your money working for you is TIME. You do not need to trade time for money...thus, more quality time with family. Let's say you have accumulated tons of money and you buy fixed income securities like long term bonds or put it in an interest bearing CDs (the very least you can do), you can live on the interest alone if you are frugal. If you stop working, do you still have cashflow? Yes! Now, the main disadvantage of being an investor is emotional attachment. If you become too attached to the company you invest in, you will not be able to let go even when the company is not performing. The future is not certain. Even big public companies can go bankrupt - Enron, Lehman, etc. Unless the companies are partially owned by the government, dubbed as GLC (government linked companies), a common practice in most Asian countries (it is common in China, Malaysia, Singapore and Japan for the government to own about 70% of a huge public utility, telephone or energy company and privatised the other 30% - once again, you have been cheated, who says socialism is bad - a mixed government system, with certain amount of regulation, might just be what we need), public companies can fold. Of course, bad investment decisions and poor management skills are hurdles that you have to overcome as an investor since you only have limited resources.
That's it about the second path! You might want to search on the net for more information.
Do you think you are an investor?
See results without votingLinks to Other Hubs
