When I was in high school, I worked after school in a factory loading trucks. This was hard work. It was a very long time ago so the rate I was paid might seem pathetic by today’s standards, but it was pretty small even by the standards of the day, at less than $1.25 per hour.
I worked for the shipping manager. He spent most of his time in a small office sitting at a desk. I don’t recall ever seeing him lift anything heavier than the telephone. I have no doubt he was paid more than me even while I literally did the heavy lifting. I was the absolute low man on the totem pole.
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. His name was Willard. I don’t remember his last name. I rarely ever saw Willard. When he came to the plant he was rarely there a full hour. I don’t know what Willard did, but he often showed up in a white Mercedes with a very pretty girl. I don’t think she was waiting to go with Willard to the next workplace. I am pretty sure she was waiting for Willard to do a brief bit of work before they went off to some leisure activity or another.
I didn’t need the college education I didn’t yet have to know which of these various people I wanted to grow up to be. It was quite clear in my mind that the shipping manager had a dead-end job. Ending up like him would be severely disappointing, and he looked like he felt that way too. Plant manager – I didn’t really think of him. Rarely saw him. But Willard – yeah. That’s who I wanted to be. 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 because if I leave it there it sounds like the worker is being cheated. Not so. Follow me.
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, the facilities, the labor and other things like insurance, accounting, etc. Let’s take a simple business. 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 and there are taxes and insurance to pay on the property, plus the original cost of buying the property.
Then you have the cost of ingredients. You have to buy lemons, sugar, water, etc. You also need equipment, your lemon squeezer, pitcher and stirrer. And supplies – cups, napkins, etc.
And there’s also your labor. Let’s assume you account for your labor at minimum wage - $15 an hour. You add all your costs up 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. Since it’s profitable, 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, then you are making more than your costs. Labor is one of your costs so you are making money from the labor of others, and 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 the people who work for you are doing because you have executives working at the company to do 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 most 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, CD’s, bonds, etc. are all loans you make to various entities, and 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 been choosing 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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