As I mentioned in a previous column, I had a high school job in a factory loading trucks. It was hard work. I was paid less than $1.25 per hour, which was a pretty pathetic wage, even by the standards of the day.
I worked for the shipping manager, who spent most of his time sitting at a desk in his small office. I don’t recall ever seeing him lift anything heavier than the telephone. I have no doubt that he was paid more than me even while I literally did the heavy lifting.
Above the shipping manager was the plant manager, who had the only air conditioned office in the plant. He was certainly paid more than the shipping manager and he had a far more comfortable work environment.
Over all of us was the owner, Willard. I rarely saw him. When he showed up at the plant in his white Mercedes, he seldom stayed a full hour.
I didn’t need a college education to know which of these various people I wanted to be. I wanted to be Willard, the owner.
When you own a business, you pay other people to do your work. And—this is key—you pay them less than you make from their work. Let me explain.
The owner of a company makes money when the income from selling their product is more than the cost of producing that product. The difference between the income and the cost is called a profit if it’s positive and a loss if it’s negative.
The cost of producing a product includes the raw materials, facilities, labor, and other things like insurance and accounting. Business schools love to use a lemonade stand as their example of a simple business. If you are a one-person lemonade stand, you have a variety of costs. You have to build your stand. The land on which your stand is located costs money. Even if it’s your front yard, there are costs to maintain the yard as well as taxes and insurance to pay on the property, plus the cost of buying the property.
Then you have the cost of ingredients. You have to buy lemons, sugar, and water. You also need equipment—a lemon squeezer, pitcher, and stirrer. And supplies —cups and napkins.
There’s also your labor. Let’s assume you account for your labor at minimum wage—$15 an hour. You add up all your costs, being careful not to leave any out. And your lemonade stand makes money. Let’s further suppose it’s so successful you are having a hard time keeping up with demand. If you hire someone to do the labor at the same rate you accounted for yourself, then you will make a profit. In fact, unless you are making a profit, there’s no reason to hire someone. In that circumstance you’re not making enough money to warrant hiring anyone, and you might consider shutting down your stand.
But if you are making a profit, then hiring people to expand your production makes sense. As you hire more people, if you continue to be profitable, you are making more than your costs. Labor is one of your costs, so you are making money from the labor of others. As long as that continues, you will hire more and more people.
This is why it can be far better to be an owner than a worker. This is why Willard had the white Mercedes and just dropped in now and then to see how his company was doing, while I worked hard in a hot factory for what was then minimum wage.
And there’s one more great invention—a form of ownership where you have an even better position than Willard. You can be a shareholder of a publicly traded company. This makes you a passive owner. You don’t even have to do as much as Willard. You don’t have to show up to see what your employees are doing, because you have executives doing that for you. All you have to do is let them do their jobs. If they do it well, you might consider buying a larger stake in the company, or just hang on and let your stake grow. If they do it poorly you can fire them. You do that by simply selling your stake in the company—your shares.
So these are your choices. You can be a worker—and most of us have to spend a majority of our lives working at something. You can also be a lender. When you put your money in a bank, you are lending it to the bank. They pay you interest because they are able to earn more than the interest on the money you lent to them. Savings accounts, CDs, and bonds are all loans you make to various entities, and you get paid interest on the loans the same way you pay interest when you borrow money from a bank.
And you can also be an owner. It’s potentially the riskiest of these three things but also potentially the most rewarding. So worker, lender, and owner. You can be all three. And my goal was always to just be the last one, owner.
What have you chosen and what would you like to be?
Hal Masover is a Chartered Retirement Planning Counselor and a registered representative. His firm, Investment Insights, LLC is at 508 N 2nd Street, Suite 203, Fairfield, IA 52556. Securities offered through, Cambridge Investment Research, Inc, a Broker/Dealer, Member FINRA/SIPC. Investment Advisor Representative, Cambridge Investment Research Advisors, Inc., a Registered Investment Advisor. Investment Insights, Inc & Cambridge are not affiliated. Comments and questions can be sent to hal.masover@emailsri.com These are the opinions of Hal Masover and not necessarily those of Cambridge, are for informational purposes only, and should not be construed or acted upon as individualized investment advice. Investing involves risk. Depending on the types of investments, there may be varying degrees of risk. Investors should be prepared to bear loss, including total loss of principal. Past performance is no guarantee of future results.
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