I first heard of investing from my Dad when I was in high school. I don’t recall any specifics except the idea that you can own a part of a company by buying stock in that company. It was about the time Alaska became a State and I had finished a term paper on ‘Alaska – the Last Frontier.’ I had to get a piece of the action so I had Dad buy me some stock in Alaska Airlines.

How could I miss? New state, airlines were getting jet planes, etc. A sure bet! Well, it never ‘took off’ and I later sold it for a negligible gain or loss.

During this time, I learned that when you buy a stock, you own a prorata share of the company. Bonds are funds that are lent to the company and represent no ownership of that company, but they are in a preferred position. Stocks are considered ‘equity’ while bonds are considered ‘debt’ or loans to the company. Both stock and bonds ‘earn’ interest; which over time equates to a return in investment. Also, most stocks pay dividends, a sharing of the profits of the company.

On the surface, it’s rather simple. You or I could start a company as follows: You put up $500 and I’ll put up $500 and we will go to the race track for the day. If we lose some, you get the first $500, I get the rest; however if I get more back than my $500, you get 10% of the winnings while I get 90%.

This simplistic example demonstrates what it would be like: you own a bond in our company, I own the stock. This scenario shows that bonds may be more secure, though with lower returns, and stocks, though riskier, may have higher reward.

A similar example can be applied to real estate which we are all exposed to whether we own or rent.

In 1968, may friend and I decided to by a duplex in Newport Beach.

    The cost or sale price was $39,000. ( “once upon a time never comes again”)

    The down payment was $ 3,000 (equity which if it was a corporation would be ‘stock’).

     The seller provided a loan of $36,000 which would be a ‘bond’ in the corporate world.

We split the work load: I manage the property, he did the accounting. We sold it about a year later for $51,000, so our profit was $12,000 minus our related costs of about $3,000 or $9,000

So our downpayment was     $3,000 (equity)

We received after costs          $9,000 (profit)

Our return on investment was   300% for the year.

But this is misleading!   Why? It doesn’t factor in the value of our own labor, which I estimate to be $3000. This reduces the profit total to $6000, or 100% return in investment, a big difference. I mention this because, should you ever be the promoter of an investment venture, you need to know that your efforts are worthy contributions.

Over the years since, I like to reflect on what the valuation of my first $1500 has become as a result of reinvesting the proceeds. It’s now grown to at least $150,000. Investing not only can augment your savings, it can protect your money from depreciation in value that comes naturally from inflation. When you have money in a savings account, or ‘cash under the mattress,’ that money will buy you less 1 year from today than it will buy today.

Inflation can be a friend or an enemy for young people. We’ll be going over more about inflation, risk factors, loans, and more in later blog posts, so stay tuned for more.


Read Finances 101 here