The concept of being a worker vs being an owner is at the heart of why we invest. As a worker you spend your time in turn for financial compensation. As an owner you spend your capital in the hope that your workers can generate returns. Both concepts are centered around money. The difference is in how it is generated. Workers are given tasks and are paid to complete those tasks. They still get paid regardless of whether the company is profitable. Owners on the other hand, are taking on financial risk. Owners are taking the money they have acquired – either through work, other ownership, or inheritance – and risking that money in order to try and generate more money. For the sake of argument, I will limit this discussion to for-profit enterprises.
When you buy stock, you are becoming a part-owner in a company. This is an incredibly important concept in the age of online trading, when you hear about people being in and out of stocks on a monthly or even daily basis. That can create a disconnect from what stock ownership actually is. It is the act of becoming a part-owner. In the same way as a person that creates a new start-up without outside funding is the owner of his company, you are the owner of the company whose stock you invest in. Granted you are a minority owner and don’t have control over operations of the (unless you control enough stock to earn a board seat) company. But you are still an owner. You are paying money, so that workers will take actions that will hopefully result in you earning more money than you paid.
The case I just described is considered passive ownership. You put up money and then your job is done. You are relying on the CEO and the rest of the companies employees to do the actual work. You sit back and reap the rewards (if any). You may hear people talk about generating passive income. All that means is you have money coming in that you do not work for. Once your passive income reaches a level you can live off without needing to supplement with active income (working), you can retire. Sounds simple right? I say that in jest, but really that is basic condition of retirement and one of the main reasons I prefer to concentrate on income investing. Regardless of whether the stock market goes up or down, my goal for every year is to bring in more passive income than the previous year. That way I know that even if my net worth has gone down, I am still closer to retirement.
Viewing investing in this light – trading my time now for the ability to become an owner and gain a perpetual future income stream – gives me an energy to want to work, to want to find additional ways to bring in money. It also helps me with my spending. It’s easier to say no to that night out that will inevitably lead to a $100+ tab when I know that by even just skipping that night once a month, I’ll have $1200 which I can safely turn into a $36 dollar income stream than I can count on to grow 6% annually. I know $36 a year doesn’t sound like much, but when you can either find new ways to bring in $100 a month, or find other areas of your life where saying no once a month can lead to $100 a month in savings, those $100 really start adding up.