Do Investors Create Value?

One of my close friends told me that investors are leaches and that they do not create any value.

It makes me wonder how many people believe this.  I guess it’s possible that many do.  I agree that there are people who make money from stocks and do not create much value.  I think these are people on the gambling side who are not really investing.  These are people who day-trade or play options.

So, do investors create value and how?

I think that most people would agree that entrepreneurs create value, by creating new goods and services.  Thomas Edison created value by creating light bulbs which replaced gas lanterns.  Henry Ford created value by creating cars, which replaced horse buggies.  Elon Musk created value by creating electric cars, which will replace gas cars.  Steve Jobs created value by creating the smart phone.

There are now thousands of companies creating value by creating new products and services.  They range from planes to solar panels to computers to yoga clothing.  Most of them needed investors to start.  Yes, investors.  Even the entrepreneur who started the company is an investor.  Edison, Ford, Musk and Jobs were investors.  The entrepreneur invested time and money to start the company.  Time is essentially money, because if the entrepreneur did not spend the time to start a company, he/she could have spent the time to work at a job to earn income.  Then the entrepreneur usually needs to get additional investors, starting with friends and family, then angel investors and then venture capitalists.  This is because the company needs investments to fund growth.  It needs the money to pay for R&D to create products, or to pay for marketing and operations.  It gets this money by selling shares to investors.  If these companies succeed, nobody would argue that everyone involved in creating the company has created value.

Investors usually take huge risks by investing in startup companies.  The far majority of startups fail, consequently, investors lose money on most investments.  So, when the few companies succeed, investors should be rewarded handsomely to compensate for the other losses, otherwise nobody would be willing to take the risk of investing in startup companies.  The reward/risk ratio needs to make sense and entice investors to invest in companies, otherwise no company would get created.

Rarely does a company stop needing investments to fund growth.  If the company becomes big enough, it goes public by getting listed on a stock market, in order to get even more investment.  It gets this money by selling shares to “retail” investors in the public.

Many people might think that the stock market’s main purpose is for investors.  Not necessarily.  It was originally created to enable companies to raise money from investors.  Companies need the stock market just as much as investors. In other words, companies need investors.

Quite often, countries work hard to attract foreign investment. They do this because they know that investors help create or grow companies, and companies create value in many ways: products, services, jobs, tax revenue, etc.

Usually investors take money that they earned from years of salaries and invest it in businesses via stocks.  This money represents their time and hard work.  Therefore, when they put it into a company, they are putting in their “years of hard work” to help create or grow the company.

One may argue that if an investor buys shares from another investor, the second investor is not helping create or fund the company and therefore is not creating any value.  There are two fallacies with this argument:

  1. When an investor buys shares from another, the investor is elevating or maintaining the price of the stock.  When the publicly traded company needs money and wants to get it from investors, it has a “secondary offering”, which is to sell stock on the stock market.  The higher the share price, the more money the company can raise to fund its growth or R&D to create a new product.
  2. Let’s say that you are an entrepreneur and you created a company that sells volleyballs.  You risked your time and money to start the company.  You took the risk in order to get reward.  While you continue to own the company, you are taking all the risk that it might fail. Let’s say that you want to sell your company.  An investor buys it from you.  When this happens, you transferred all of the risk to the investor, but all of the reward should transfer to the investor as well.  If the company does well and grows while under the investor’s ownership, the investor deserves all of the upside reward.  Let’s say the investor sells the company to another investor, all of the risk and reward is transferred again.  The second investor took on all of the risk by giving his/her money to the first investor.  The second investor deserves all of the reward going forward.  If the company continues to sell volleyballs, it is providing value to customers because the customers are getting value from the volleyballs.  Therefore, both investors were providing value.  The entrepreneur who started the company is no longer providing value.

Instead of buying and selling complete companies, such as the volleyball company, investors on the stock market are buying and selling portions, or shares, of companies.  Therefore, they are responsible for a portion of the value that the company provides to its customers.  To get into this position, many retail investors risked their life savings to do this.  Quite often, publicly traded companies flounder or fail, causing investors to lose money.  When companies do well, investors make money.  This risk/reward ratio needs to be enticing, otherwise no investors would help companies grow and create new products.

So, if you are an investor in companies, via stocks, you risked your money, that you earned through years of hard work, in order to get reward.  You will lose on some of your investments and win on others.  You should be rewarded for taking the risk.  When you are rewarded, you deserve it.  On top of this, you are creating value by owning companies, which create value.  If they didn’t create value, they wouldn’t exist.

Some investors make more money than other investors. This is usually because they helped companies (by investing in them) that created the most value. If you helped Netflix, you helped them create a ton of value for society. By investing in mainly companies that create the most value, you will make the most money. It makes sense because if you help provide a lot of value to society, you should make a lot of money. Also, this is in line with risk/reward. If you invested in Netflix when it was one year old (when Netflix needed investors the most), you would have taken much more risk and therefore should make much more money than if you invested in Netflix when it is 10 years old.

You should never apologize to anyone for being an investor.  You are part of a system that creates most of the wealth for society.  Without companies that create new products and services, our society would be dirt poor.  We wouldn’t have most of the things that you see around you.  Take a look around your room, your house, your street, your city and your country.  Most of that wouldn’t exist if it wasn’t for companies.  The majority of workers in the country wouldn’t have jobs and salaries if it wasn’t for companies.

Investors deserve every cent that they make. They enable companies to provide value, which help the economy provide value. The economy feeds everyone and pays for everything, including the government. The rich countries are rich because of their economies, which are made up of companies, which are created and funded by investors.

But, if you make money, others will feel entitled to it. They are wrong. They are not entitled to it. They didn’t take huge risks, by putting their life savings, which represents many years of hard work, into companies, which can go bankrupt or create a ton of value.

Even if you didn’t work or take any risks, they are not entitled to it. Let’s say you won the lottery. Am I entitled to your winnings? No.

But unfortunately, you live in a society where others will be able to forcibly take your money by voting in governments to do it for them.

They want you to take all of the risk, but they want a portion of the reward, by taxing you.  When you earned your money from your job, you already paid income tax on that.  Then when you invest that after-tax money and make capital gains, the government wants to take your money again.  They take no risk, but take a lot of the reward.

You should be proud to be an investor, for helping create wealth for many people throughout society.  The question should be:  “Does the government create any or sufficient value for the money that they take?”

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