Business owners have a unique perspective on what it means to own and operate a business (they are the only people who truly understand the ups and downs). Owners also uniquely understand business risks. If you have ever skipped a paycheck to make sure your employees get paid or used your house as collateral for your business you know what I mean.
Yet, even if you don’t own a business, understanding the advantages and disadvantages of business ownership is important. First, anyone can own a piece of a business by buying stock in a publicly traded company; and most people should own equities. Why? In well-functioning capitalist societies business ownership outperforms wage growth… and of course, it should. Business owners take all the risk (remember who risked their house in the previous example), and they have to get rewarded for that.
The graph below “The worker vs. the owners” articulates this point. In times of economic growth, business ownership (shown here by the index performance of the S&P500) significantly outperforms wage growth.
When people see a graph like this there are two common reactions:
I understand the power of business ownership in wealth creation. Even if I don’t own a piece of the business I work for, I’m going to invest in equities to help my wealth grow faster than my wages. But also, business ownership seems extremely volatile AND what happens in the recessions (which conveniently aren’t shown here)???
The black lines go up. Leverage!
If you know me well, you know I believe the first take is the most reasonable one. Business ownership can be life-changing for wealth creation but it has enough ups and downs on the operating side… you don’t need to magnify the financial ups and downs with leverage. And what about those recessions? Those are the things that will wipe you out completely if you don’t have a strong balance sheet. Of course, the author of the chart left those off… because showing economic downturns where business wealth declines more quickly than wages makes this conversation more complex.