Are You An Owner or Lender? | Brandon Averill, Justin Dyer | AWM Insights #95

To understand investing, you must start with ownership and lending. You can use your money to either buy ownership or lend it to borrowers. Investors are either owners or lenders, anything else is a speculator.   OwnershipParticipation in profits, growth, cash flow. You own the future of the business for good or bad.A stock, mutual fund, or ETF is your claim to the assets minus liabilities, but most importantly the stream of future profits. LendingLoaning out money in exchange for fixed payments and eventually a return of your initial investment. Individual bonds, bond funds, or bond ETFs do not entitle you to the growth of a company. But in exchange, if the company goes out of business, you have a higher claim on the company’s assets than stockholders (ownership).EPISODE HIGHLIGHTS:(1:05) The very first principle of investing. (1:53) Ownership versus lending. (2:25) Ownership is a claim to the company’s profits. And that means risk if the business does poorly.(3:30) Your equity in the business is assets minus liabilities and the future profits or cash flows from the business. (4:05) Companies may not be profitable now but have the potential for large future profits which will make the company valuable.(4:42) Real estate equity is the same math as equity in a company. (5:55) Rental real estate and the future income it provides is a great example. (6:15) Discounted Cash Flow explained. This is how you value an asset.   (7:20) Valuation is the basic principle of financial markets. It’s the same process no matter what asset you choose to value. (8:08) When it comes to being an owner or lender, you can do it in the public market or private market. The biggest differences between the two is efficiency of information and volume of transactions. (9:08) Private markets have illiquidity issues and slower transaction time to complete a purchase or sale. (9:45) If you own the shares in a public company and they release reports about their expected future cash flows increasing. The value of your ownership has gone up.(11:49) Lending is called fixed income and/or bonds in the industry. (12:40) You lend your money in exchange for interest and your initial investment is returned at the time period.(13:00) Lenders have a higher claim than owners in the event of bankruptcy so it is less risky to be an owner. But you also are not entitled to profits if the company does extremely well. (13:57) Public Debt vs Private Debt (14:30) A good example is mortgage lenders and the specialization of lenders.(16:50) A good example of lending is Microsoft selling bonds to investors. Because Microsoft is so large and with a strong balance sheet. They are able to get a very low interest rate which the market sets. (17:30) Tax treatment is a huge area where lending versus ownership is much different. Ordinary income versus capital gains respectively. (18:30) What about gold, art, and crypto?(19:11) It’s not an investment if it doesn’t fall into either ownership of a business or lending. It is speculation.(19:11) Gold, art, bitcoin are all speculative because there are no future earnings or cash flow to expect. You only hope to sell at a higher price.(19:11) Crypto is not ownership nor lending. Your only return will come from selling at higher price (or lower).