movement: up. They don’t understand the concept that stocks are agile. We can learn to profit from a stock no matter if it goes up, down, or sideways. That’s very tough to do in business, but in the stock market, it doesn’t matter—because there are profit strategies for movement in any direction. We will look at these strategies in detail in later chapters of this book.
Of all the asset classes, the stock market is probably one of the least difficult in which to earn a profit in relationship to the economy. When the stock market goes up we can buy stock, and when the stock market goes down we can short stocks. Shorting a stock is positioning yourself to make money when the price falls. If we use the stock market and the options market in harmony with each other, there are many income strategies that can provide cash flow even when the stock market is stagnant or going down.
Stocks Give Us the Ability to Scale
There is a common misconception that you need a lot of money before you can begin to invest. Perhaps that’s why so many people put off their investing for so long. Some people never get around to it. Fortunately, investing in stocks allows almost anyone to begin their investing sooner rather than later.
Because buying stock is buying only a share of a company, buying stock is more affordable for the average person than buying an entire company or starting a business. But the beauty of this is that you can own exactly the same stocks as a famous investor like Warren Buffett. The difference is that, as a new investor, you’ll probably buy a smaller number of shares than Buffett. A company you want to invest in may be a multi-billion-dollar enterprise, but you may be able to get a single share of its stock for just $25. The cost effectiveness of stock allows you to scale up into your investing as you gain the means to go bigger. For the average person, this is a faster way to invest than saving up for decades to purchase a franchise or some other business.
I frequently have students in my classes who love to talk about investing, but who have not yet actually bought any assets. They read a lot of investing books and listen to informative audio courses on building wealth. Yet their asset column is blank. They are making the mistake of waiting until they have a lot of money to begin investing. It’s like the person who spends years reading every book they can find on how to play the piano, yet keeps putting off actually sitting down and playing a note. It’s just not necessary. There is room for everyone at every level to sit down and play. Education is key, but remember that part of your education includes doing something.
Another avenue of profitable stock market investing is the options market. An option is the right to buy or sell a particular thing at a specified price within a set time frame. Just as we saw with stocks, options are also a very affordable way for anyone to begin their investing. As you advance in your knowledge and experience with options, you might be surprised to find just how much stock you can take control of for relatively small amounts of money and risk. In my view, this scalability is very attractive. It permits almost anyone to quickly place an asset on his or her financial statement. In fact, acquiring an asset with stocks can be done faster than any other asset class. Plus, the lessons learned from researching in the stock market are skills that will carry over into both real estate and general business. The stock market is a great place to learn about the concepts of exit strategy, hedging, and capital gains versus cash flow.
Leveraging with Debt
Like the real estate market, the stock market allows ample opportunity to use OPM. As stock investors we can take advantage of something that is called a margin account. Buying stock on margin allows you to leverage your money in a way that’s a little different than how a real estate investor would use a bank loan. In my opinion, intelligently leveraging money with good debt is something that should be respected rather than something that should be feared. The debt that people should fear is debt that must be paid off by working at a job.
Leveraging without Debt
The options market offers us something more interesting than we can get with stocks alone. With options, we have the ability to leverage our money without going into debt at all. This type of leverage is very important because it can also act as something called a hedge. We will learn more about what hedges are and how you can use options to actually protect your stocks against loss in later chapters of this book.
One Asset Class Is Not Better than Another
One of the things you’ll never hear me do is bash any particular asset class. I have often heard real estate teachers who bash the stock market and stock market teachers who bash the real estate market. Having a business is not “better” than owning real estate. Investing in real estate is not “worse” than investing in stock. Wise investors simply consider what they want to achieve with their investments, and then invest accordingly. I think many successful investors enjoy the diversification of owning assets across all the asset classes.
A person who invests exclusively in stocks is going to miss out on many of the tax advantages that the business owner will enjoy. A real estate investor may like the idea of having a portion of his wealth invested in assets that are liquid. An investor who believes the stock market will fall due to a bubble may be interested in exploiting that situation by seeking a capital gain that is available because of the agility of the stock market.
Here is a basic comparison table of what the different asset classes offer to investors. This table is not comprehensive, but it does illustrate the fact that investors can use different asset classes to achieve different investing goals:
Remember: this table doesn’t show “better” and “worse” investment options. Instead, it shows you a simple comparison of just a few of the attributes of each asset class. Depending on your situation, liquidity can be good or bad. Being able to negotiate the price of an asset can be good or bad. Everything is relative. Everything is subjective.
Sometimes it’s more important for you to ask new questions than to have new answers. Pause for a moment and consider which questions you are asking:
“What stock should I buy?”
Or… “Where do paper assets fit into my overall financial plan, my financial statement?”
The difference, of course, is your context. And that can make all the difference.
If we understand the various benefits and drawbacks of stocks, we will have an intelligent way of deciding how we can use them to achieve our investing goals. Conversely, the less a person understands about stocks the more likely a person is to fail when they use them in their strategy for investing.
Sales
If you’re in business and you have inventory and you want to turn it back into cash, what do you need? Sales. If you have real estate and you want to cash out, what do you need? Sales. Not everyone likes putting on a smile and turning on the charm and making the sale. Stocks allow you to make sales without being a salesman. That’s a huge advantage for a lot of people. Just click a button and...sold! I once had a business with a million dollars tied up in inventory. I guarantee there were days when I wished I could just click the mouse and make the sale. And I like sales.
While there is no good or bad asset class, business is my favorite because I am best suited to sales. I like people. Business is fun to me. That’s the sandbox I like to play in. But I love the agility of paper. The stock market is the place I see where I can make money even if the economy completely crashes. There’s a lot of fun in that too, let me tell you.
