There are many different assets that generate passive income. From Real Estate to Trading, there are an abundant amount of options to choose from. My personal favorite is the stock market. To be specific, I like to invest in stocks, not trade. Which leads me to my first principle:
Know the difference between Investing and Trading Stocks
The difference between investing and trading stocks can be as simple as the short term vs the long term. Whether you are trading within a day, week, or month; the goal is to time the market in pursuit of a profit. Trading is focused on the price.
On the other hand, investing in stocks is focused on value. Buying quality companies at good prices, and holding for multiple years is the game of stock investing. Both methods use similar formulas and tactics like P/E ratios, but there is a major mental shift between the two models for acquiring wealth.
P.S. Investing is far more practical for actually making money via the stock market.
Buy Low, Sell High
This may be the greatest investment, economic, and business principle ever created. It’s also the simplest and most overlooked. As someone who bought stocks at a high when I first got into investing; I can say with full confidence that you will not turn a profit buying pricey/overvalued companies. Learn the ebbs and flows of the market. Be aware of the current market conditions, and most importantly research the companies you are buying before you order.
The Market gives us opportunities NOT information
If you made it this far…congratulations. This principle is pure gold; it comes from a mental model called “Mr.Market”. Mr.Market is parable by legendary economist Benjamin Graham, and it basically describes the stock market as irrational and contradictory. Why is this important? This is NOT how most people view the stock market. The stock market is generally viewed as a source of information. People study the behavior deeply in order to forecast its behavior. They create charts in hopes of signaling what the next market play should be. Graham laughs at this approach.
The stock market is unpredictable. It just shows up everyday with over and under valued companies. It’s your obligation to figure out which ones are worth buying and take advantage of the opportunity.
