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Investing for the Self-Employed: Earn from Other Companies

08 9月 2022

Investing for the Self-Employed | VI College

We know how frustrating it can be to work hard all day and then watch your savings dwindle because your expenses just keep growing.

Your salary remains around the same size each year, except with maybe a little increment every couple of years, yet prices are going up at a faster rate, so it's difficult to catch up.

Things can be even more challenging if you're self-employed. Unlike employees, you may not have a fixed income each month.

That's why I've been saying for years that investing for self-employed people is criminally underrated. Just because you're focused on building your own business doesn't mean you shouldn't be investing in bigger businesses to grow the money you already have. 

Why don't most of us have enough money, like... almost all the time?

Yes, there's a possibility that you are not managing your money properly, which is why you're incurring more expenses than savings.

But apart from that, your income is also not catching up with the prices anymore. For example, if you live in Singapore, you would be familiar with the "Chinese New Year" price increase. Prices that were supposed to increase in conjunction with the Chinese New Year do not come back down after, and the same thing repeats the next year.

This is why you should use the power of the stock market to at least catch up with this perpetual increase. To invest when you're self-employed is a lot easier than managing yet another business to grow your income!

Employee vs self-employed

Investing for the Self-Employed | VI College

Yes, there is plenty of upside to being self-employed. You're your own boss, you can end up creating a big successful business and hopefully, change the world with it.

However, there is also a major downside - you don't have a stable income. Being an employee, you have a fixed amount of salary coming each month as long as you go to work.

But if you're self-employed, whether you have enough to spend for the month or not depends largely on whether or not your business is generating enough income for the month.

Since there's only one of you and there's a limit to what you can do in a day, why not just supplement your income by investing?

Investing for self-employed people is not that much different than for a typical employee. You just need to carry these 4 principles with you all the time.

MODS Investment Principles

MODS Investment Principles | VI College

1. Mr Market

In his book, The Intelligent Investor, Benjamin Graham came up with Mr Market, a fictitious character who represents the stock market.

He is described as someone who's temperamental and would offer to buy over your shares every day at different prices, depending on his mood that day.

Such is the actual stock market. The share prices change every single day depending on investors' sentiments. If investors are optimistic and buy a lot, prices would go up, and if they're pessimistic, prices tend to drop.

These price movements have nothing to do with the actual value of a stock, and therefore, you should not follow the "mood swings" of the market.

2. Ownership of business

Most people see stocks as just numbers: "I'll just buy this at $2 and sell it when it hits $10".

But the stock is much more than that – it’s a real living and breathing business. What if this stock that you've sold at $10 reaches $100 per share because the owners are really good at what they do?

Or worse, what if the share never hit $10 and instead went the other way to hit $0.05?

To invest in a stock is to have ownership in the business. So instead of betting on whether the price will go up or down next, you should be really thinking about their growth strategies, the management's integrity, and the financial performance, much like if you're the owner of that business.

3. Diversification vs diworsification

There's good and bad to diversifying your investments. On one hand, diversifying your investments in different asset classes lowers your risks. But on the other hand, your returns might also be stunted. 

So what should you do?

If you decide to diversify, make sure you have the time to monitor all stocks and asset classes closely. On top of that, make sure that all your stocks are within your Circle of Competence, i.e., the industries that you know well.

For example, if you are a restaurant manager, your Circle of Competence would be the food and beverage industry. So don't go investing in oil companies and solar energy because that increases your risk and you'll end "diworsifying" your investment.

4. Margin of safety

A margin of safety refers to the "cushion" or "buffer for error" between your buying price and the company's intrinsic value.

Let's say a company's intrinsic value is $10 and the share price is now $5. This means you have a margin of safety of 50% if you buy the stock now. This 50% helps you cover for things like errors in calculation or as a safety net. 

Maybe one day you realise that you've miscalculated, and the intrinsic value turns out to be $8, not 10. You will at least still have a 38% margin of safety.

So when investing in a stock, always make sure you have a margin of safety in place. 

There's actually an advantage for self-employed people to invest. Because they are running their own business and have first-hand experience in how it actually works, it is easier for them to understand a stock as a business and "see" its trajectory taking from their business acumen.

But before doing all that, the key to long-term success with investing is having the right knowledge, practising it, and sticking to it.

Have the right foundation in investing. Join us for a free masterclass today.