Principle #2: Value Creation is Making Money

The secret to making money is to:

  1. Add Value; and
  2. Find a context to deliver the value you added.

Ultimately, making money requires both your ability to add value combined with a context to add that value whether it is in a job or in a business where the customer is the consumer of that value.

Making Money = Value Creation

You may not think of your job in this way – especially if you are paid by the time you spend at work (either an hourly wage or a salary). While this may be true on a day-to-day basis, most certainly in the medium to long term, your employer or end customer is evaluating the value you create against the price they pay. In the short term, price may not reflect value. However, in the long term, it almost always does.

For many, this is a paradigm shift. That is, your career is really the sum of all activities you do to add or create value. If you further extend this to everyone in our society, you’ll note that an economy is really the sum of all the value creation activities by its citizens. In fact, an economy is healthy if:

Value Creation > Value Consumption

This concept is fundamental to your career. It’s also fundamental to investing. When we invest in a share of a business, we’re purchasing a share of its value creation – the efforts and the intellect of all of its employees to generate value. In fact, this is the fundamental difference between “investing” and “trading” (or gambling).

“Trading”, like gambling, is a zero-sum-game where an asset (shares, bonds, precious metals, bitcoins, etc.) is purchased for the sole purpose of re-selling to someone else for a higher price. For someone to win, someone else generally has to lose (eventually).

On the other hand, “Investing” is participation in value creation.

Successful investing can be difficult as it involves a careful analysis of the difference between the Price and the Value of an asset (see Principle #7). Nevertheless, it begins with the understanding that Making Money = Value Creation. A concept fundamental to financial literacy.

Facebook
Twitter
LinkedIn
Recent Comments
    Exit mobile version