Building Equity in Businesses

The easiest way to build your net worth is to build your ownership of businesses. Why? Simple. If you rely on your labor, your ability to work, you are always going to be limited by your physical capacity for labor and the amount of time you can put into your efforts. Ownership of a business or businesses, on the other hand, can allow you to make money. Think about all the people in the world drinking soda, or shaving, or heating their homes all while you are sleeping at home, secure in your bed!

For some people, ownership comes in the form of a home business, or becoming partner at a law firm, perhaps even opening their own franchise. For a vast majority of Americans, it comes in the form of mutual funds or stocks in a 401k or IRA. How can you bridge the gap between ownership and stocks? For starters, read our five-page guide called Business-Like Investing: Thinking Like an Owner and Getting Rich by Investing in an Excellent Business: Why the Quality of a Company Can Determine Your Overall Results.

A few things you want to look for:

• Reasonable valuation. In Price is Paramount, you can learn about how the price you pay for an asset determines the return you will earn on your investment, not necessarily the underlying growth in profits. That's an important lesson that many people fail to learn despite very costly, and repeated, mistakes.

• Increasing cash dividends. One of the surest signs that a company is actually earning true economic profit is its ability to continually raise its cash dividend. It's hard to fake sending checks out in the mail!

• Shareholder-friendly management. How can you tell if a management is acting for the owners' benefit? There are no fool-proof methods, but there are seven signs that management acts in shareholders' interests.