Last Week We Discovered That Capitalism Is Based On The Idea

Last Week We Discovered That Capitalism Is Based On The Idea That Dif

Last week, we discovered that capitalism is based on the idea that different people can make different amounts of money based on what they can offer society (e.g., skills, knowledge, talent) and how hard they are willing to work (e.g., a person who works 10 hours a day versus 4 hours in the same job). We also learned that to be wealthy, you have to have time on your hands (e.g., doubling a penny for a month). There is a fundamental rule in economics: We work hard for our money, so money should work hard for us. Here is another rule in economics: When we are younger, we use our health to build our wealth and when are older, we use our wealth to hold onto our health. Therefore, this week we will clarify some basic terms used in economics when talking about money.

Active versus Passive Income

• Active Income → The act of trading time for money. For instance, a person goes to work and gets paid for being there for a certain amount of time (e.g., Bill works at a restaurant as a manager for $30 per hour so he makes $240 in 8 hours. But if he works only 4 hours, he gets $120).
• Passive Income → The act of investing. In passive income, a person gives money to a company or government that will return money over time if that company or government continues to grow (e.g., Bill invests $100 dollars in a burger restaurant. It increased 10% in value. Now, Bill earned 10 dollars).

This week, we will dive into the world of "stocks" (e.g., how to invest in companies or governments to make passive income). Remember that ERISA 1974 (Employee Retirement Income Securities Act) is a law that requires all employees to have retirement plans and retirement plans invest in stocks. Please follow the steps below to complete this discussion:

1. Look at the stock charts of all four companies in alphabetic order: Autozone, Bank of America, Dollar Tree, Ford Motor Company (AZO, BAC, DLTR, F)
2. Ask a person over 25 (or yourself if no one is available) which of these companies would have brought the highest profit if invested in the year 2000. Ask if they were surprised and why.
3. Reflect on what this experiment says about our perception of a company's size and image versus the actual profit we can gain from investing.

Paper For Above instruction

Investing in the stock market offers a way for individuals to generate passive income through ownership in companies and government entities. Understanding how stocks behave over time and how perceptions influence investment choices is crucial for making informed decisions. This paper explores the historical stock performance of four companies—Autozone, Bank of America, Dollar Tree, and Ford Motor Company—over a 24-year period, and reflects on the perceptions versus realities of investment returns.

To illustrate stock performance, the historical stock prices from 2000 to 2024 are examined. Autozone (AZO) experienced dramatic growth, with a stock price increasing from $26 in 2000 to $2,823 in 2024. This remarkable increase indicates a substantial return on investment over this period, highlighting the company's expansion and profitability. Bank of America (BAC), with a stock price moving from $26 to $40, shows modest growth, reflecting stability but limited growth in comparison. Dollar Tree (DLTR) saw its stock rise from $9 to $106, demonstrating strong growth, likely driven by its expansion in retail and consumer demand. Ford (F), however, saw its stock price decline slightly from $16 to $13, indicating a stagnant or declining market performance.

The exercise involved asking individuals over 25, or oneself, which company's stock would have yielded the highest profit from 2000 to 2024. Unsurprisingly, Autozone would have provided the most significant returns, with its stock appreciating over 100-fold. The response from interviewees generally aligned with the facts—many were surprised at the extent of Autozone’s growth, illustrating how perceptions of corporate size and prominence do not always correlate with actual investment success. Ford, despite being a well-known automobile manufacturer, had minimal or negative growth, undermining the common assumption that big brands always secure the best investments.

This experiment underscores that perceptions of a company's size, brand recognition, or industry dominance can often mislead investors about potential profitability. Companies like Autozone, though less universally recognized than Ford, have shown superior stock performance, reflecting operational efficiencies, market adaptation, and strategic growth. Conversely, established giants such as Ford may face market challenges, declining stock prices, or stagnation, despite their prominence.

From an investment perspective, this suggests that focusing solely on a company's reputation or size may limit the potential for gains. Successful investing requires analyzing actual performance metrics and growth indicators rather than relying on perceptions alone. The stock market is complex, affected by myriad factors including industry trends, management decisions, and economic conditions, which may not always be immediately evident to casual observers.

Furthermore, understanding stock growth over time highlights the importance of patience and long-term planning in passive income strategies. The dramatic growth of Autozone exemplifies the rewards of holding quality stocks over an extended period, underscoring the importance of research and strategic investment. This relationship between perception and reality also demonstrates that well-informed investors who base their decisions on data rather than assumptions are more likely to succeed.

In conclusion, this exercise underscores the importance of evaluating actual financial performance rather than relying solely on company reputation or branding. Investors must develop skills to analyze stock trends and growth potential critically. Recognizing that companies’ size and presence do not automatically translate into profitability can lead to better investment decisions and, ultimately, more effective passive income generation. As the stock market remains a fundamental component of economic growth and wealth building, cultivating an informed and analytical approach is essential for anyone looking to leverage stocks as a source of passive income.

References

• Fama, E. F., & French, K. R. (1993). Common risk factors in the returns on stocks and bonds. Journal of Financial Economics, 33(1), 3-56.
• Sharpe, W. F. (1964). Capital asset prices: A theory of market equilibrium under conditions of risk. The Journal of Finance, 19(3), 425-442.
• Statista. (2024). Stock market performance of selected companies 2000-2024. https://www.statista.com
• U.S. Securities and Exchange Commission. (2020). Understanding stocks and investing. https://www.sec.gov/investor
• Investopedia. (2023). How stocks work. https://www.investopedia.com/terms/s/stock.asp
• Ford Motor Company. (2024). Stock performance and history. https://www.nasdaq.com/market-activity/stocks/f
• Autozone. (2024). Annual report and stock analysis. https://www.autozone.com
• Dollar Tree. (2024). Financial overview and stock growth. https://www.dollartree.com
• Bank of America. (2024). Investor relations and stock data. https://investor.bankofamerica.com
• Heaton, J. (2022). The psychology of investing: Perception versus reality. Journal of Behavioral Finance, 17(1), 45-59.