I just bought some British Petroleum stock. Having just sold an e-commerce company, I was looking for a ‘good’ place to put some money.
It’s location independent.
It’s passive investment income. The 6% dividend yield will likely pay out for my entire life.
It’s more stable that an Amazon FBA business.
Dividends should increase and the stock price should appreciate with inflation.
Lower tax rate than earned income.
Ahhh Yes…. (I smiled)… One more step towards life-long financial freedom without needing to do any work whatsoever.
Until I Calculated My Return On Investment…
Let’s compare my investment in British Petroleum to my investment in my own company… TravelSource, LLC. (which I started with $5,000)
BP Returns
With a 6% dividend yield, $5,000 nets me about $300 in dividends per year, or a little less than $1/day return on investment. (Remember when I was living on $1/day??)
Over 10 years, I earn about $3,000. I’m collecting a matching $5,000 return every 16 years or so and I still own the underlying (appreciated) stock.
In 10 years, the stock likely will appreciate 3%/year and maybe I can sell it for a $1,719 gain.
TravelSource Returns
TravelSource broke even in the first ~18 months.
After the first year, TravelSource pays me about $10,000/year in profits. ($30/day)
Selling the business for 2X annual income ($20,000) nets me a $15,000 gain.
Once you lay out the return on investment with an investment calculator, it’s obvious that I earn much more owning my small business than by owning a portion of BP. ‘Passive dividends for life’ is tempting but look at the bottom line, showing over 20X difference in total gains.
As soon as I calculated these returns, two concerns came to mind. Do you have these same concerns?
1. Risk!!
Risk vs. Reward. It’s the chief concern of every investor. Shouldn’t we take this into account when you make your calculations?
TravelSource may fall apart in a few years (it’s a small Internet company with 3 products) whereas BP is very likely to be paying dividends in 2117.
This concerned me until my investment calculator revealed that I was grossly miscalculating the relative value of business profits vs. the ‘long-term’ benefits of dividend payments. It’s similar to people who buy cheap lottery tickets without understanding their minuscule 1-in-9,999,999,999 chance of winning.
Yes, BP will pay dividends and provide a return on investment for the next 25 years… but my business will earn the same investment income in just 1 year. I’ll trust myself to manage my own money for the next 365 days instead of holding BP stock for the next 10,000 days.
2. Total Passiveness vs. Active Management
When I invest in BP, I don’t need to do anything in order to collect investment income and lifetime quarterly payments are tempting. You could get a lobotomy and those checks would still come in.
Owning TravelSource, I need to check in from time-to-time, communicate with freelancers, calculate P/L for taxes, plan how to grow the business and worry if shipments will arrive before I’m out of stock.
But when you look deeper, you notice something not so immediately obvious. Most of the people buying BP stock work damn hard for the money they invest whereas TravelSource is now 95% passive.
Final Thoughts On Buying Stocks Or Investing In Your Own Business
I’d like to make tons of cash without lifting a finger, but as I run the numbers with a variety of different inputs and possible scenarios, I find that business owners are almost always better managers of their own capital than someone else.
It’s not primarily about being lazy or hard working, but more about taking responsibility for your financial returns, rather than passing the responsibility on to someone else.
You take responsibility by trusting yourself, investing in yourself, getting educated, building your personal ‘equity’ and skills, working on and in your business, potentially losing money when you make a mistake, and making your own return.
I’ll still invest in stocks, but only for cash-value preservation. In the meantime, I’ll look for ways to put the money back to work in a business I control where double-or-triple digit returns are the norm.
I’m hooked on investing in my own businesses. Mutual funds, stocks, bonds and even my tax-advantaged IRA will take a back seat.
Want to own an Internet business without making the initial investment yourself? Read the description of the Apprenticeship on the home page.
