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Extra info for Bypass Wall Street: A Biologist’s Guide to the Rat Race
This company is going to make $1 million profit per year for the foreseeable future, in a world with no inflation. These profits will all get paid out as dividends to the stockholders. , they add up to $20 million at their current price. One million dollars divided by $20 million is 5%. This means that each year, stockholders get back 5% of their investment in the form of cash dividends. Buying this stock would then be a good idea, beating the 3% Jen will get from paying down her mortgage. But if the share price were higher, pricing the exact same company at $100 million, then Jen would only get 1% of her investment back each year in dividend payments.
How can we invest in such a way as to make the pie bigger, rather than compete to own a larger share of a pie of fixed size? I’ll assume that most readers either have money to invest or are at least planning to have money to invest one day. Individual circumstances do make a difference, and so I’ll consider a range of investment scenarios at various points in the book, in order to give practical suggestions. That said, I will mostly focus on one, embodied by a character I’ll call Jen, who is designed to make some general points.
Like all savings instruments, buying stock means handing over money today in exchange for money back later. So Jen should look out for companies that make good profits and have rosy futures. Indeed, one of Jen’s friends made a lot of money through a policy of investing in companies that make products he likes to buy, especially Apple and North Face. He figures that if he likes their products, other people will too, and the companies will do well. Jen also likes these companies’ products, the companies seem to be managed well, and they probably have a great future making lots of profit from these great products.