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Better to Build a Business or Invest in Stocks?


There are many roads to wealth, freedom and happiness. Recently I was having drinks with friends and we began discussing the different roads that we each have been exploring.

The conversation was mainly between myself and two others. Both of them are passionate investors. They follow the markets and buy in when they think the time is right. My road is a bit different, I believe in creating businesses.

Why Start a Business?

From my point of view, businesses are the best ways to acquire wealth. A business may either be service or product based.

A product based business is a lot easier to scale as long as your not the only one that can make the product. However, a person that expertly provides a service can charge a premium price. A combination of the two types of businesses can also be successful.

The benefit of starting a business is that you can eventually remove yourself from the equation. By hiring the right people and putting the right systems into place an entrepreneur has the opportunity to create a cash flow without having to be involved in the day-to-day activities. This is not always possible but it is an option for some businesses.

As long as startup costs are low, an entrepreneur could start making a living from a business almost immediately.

Another benefit of building a successful business is that there is always a possibility of selling it off to the right buyer. If such an opportunity should arrive, an entrepreneur has the chance to cash in on their hard work and move on to bigger and better things, or retire.

The downside to a business is that it can take a lot of time to get things started. It could be years before it pays off, if ever.

Why Invest in the Stock Market?

For a keen market observer, investing in stocks can be very lucrative. However, in my opinion, investing in stocks is almost the same as investing in the blackjack table.

An investor has a bit more freedom to watch the markets and invest a little or a lot depending on how they feel. An investor could buy a bunch of penny stocks for a few dollars or a few shares of Apple (AAPL) at the equivalent of a modest mortgage payment. Each investment has no direct consequence to the one before or after it.

If you buy into companies that have a solid track record your initial investment will probably increase. Over the course of time the market usually increases.

The downside to investing in the stock market is that it can be a gamble. If you don’t believe me then just ask most investors who put money into the market before the crash. The other issue is that it may take decades before you see a return on your investment high enough to live off of.

The Clear Choice Is…

The point is that there is no clear choice. Everyone’s DNA is different. If yours is telling you to invest, then invest. If your DNA is telling you to start a business, then that is probably the direction to go. Ther are pros and cons to each.

Of course there is always the third option. Do both. The more streams of income one has the better chance there is that something is going to pay off.

The only one clear choice on the road to wealth, freedom and happiness is not as an employee. It may be where most of us start but hopefully it isn’t where we end.

So, what are you thoughts? Do you invest or build businesses? Leave a comment below.
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Image Credit: cc licensed flickr photo shared by ethan.crowley

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By Matt – June 23, 2010

  • Erich

    Hey Matt, first off, great post!

    As someone mentioned in the article I thought I'd weigh in with some thoughts on the topic.
    I agree with most of what you said, and would add that a major difference between the two investing styles is the time invested in either. Every small business owner I know puts in 60+ working hours a week. I don't know anyone in this category who has been able to get to the point where they aren't still very involved in the day-to-day operations of their business.

    While investing in stocks also requires some time do do the relevant research, it is much less than the time a small business owner spends, and also much more flexible. For someone like myself whose time is very limited at the moment, investing in stocks is the only reasonable choice. Plus I like the idea of Steve Jobs working for me :D

    As for likening stock investing to blackjack, for me stock investing is definitely less risky. Consider that over the last 100 years the US stock market has grown by 10% each year on average. Also, the market undergoes a major correction about every 7 years on average. This means that if an investor is patient enough to wait until the market makes another major dip, they can make quite a nice return just investing in an S&P 500 index fund.

    As for personal investment style, I am a long-term value investor. This means that I try to buy into solid companies when their stock price is temporarily undervalued. This can happen to any great company due to general market swings, bad publicity (see BP at the moment), short-term negative company news (such as lower than expected earnings, etc…), or even longer periods with no news at all (see BSRC).

    For me, one of the most important criteria in spotting a good value buy is finding companies that exploit or define strong current cultural trends.

    A quick example is Netflix (NFLX). During the recent tough economic times in the US, people are choosing not to spend money on going to the movies or driving to a DVD rental store. Instead they have their favorite DVDs delivered in the mail. Netflix has begun offering instant movie streaming on many titles, which directly plays into the American cultural value of convenience, and instant gratification. Further, they are beginning to partner with console makers, who ship their devices (i.e. the Xbox and Wii) with Netflix access.

    When I see how this company is cleverly exploiting cultural trends, all it takes it patience to wait until its stock price dips to buy in (in my case at $27, later again at $19).

    That's my 2 cents on the subject. Happy investing everyone!
    - E

  • http://blog.matthewhooper.com/ Matt Hooper

    Interesting comments and I tend to agree with most of them.

    However, I think that the business owners that put 60+ hours a week into their business have done it wrong. If you are the single point of failure in your business then you haven't built yourself a business you have bought yourself a job. I should also clarify, when I say “wrong” I should really say “wrong for me”.

    There are different approaches to owning and doing business. If you have set your business up from the beginning with the end goal to step away it from then it is possible. A business owner may have to put 60+ hours into it to get the business started but if you have a competent team working for you then it should make money if you are there or not.

    Obviously in Mr. Jobs' case he likes to keep control over everything. Micromanaging works for him but it isn't something that I would want to have to deal with. It might mean that I won't make billions but I am sure the millions will be enough. ;-)

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