Just like in companies, if you don’t make a profit, you don’t develop – 07/12/2023 – From Grain to Grain

You’ve probably heard that stock prices track company earnings. However, few understand that the same should apply in our financial life. In many situations, the control of our finances must follow a similar path to that of a company.

For around 70% of the companies traded on the B3, the variation in the price of shares over the last five years has followed the same direction as profits. This means that if profits went up, the share price went up and if profits went down, stock prices went down, in this period.

Do you agree that it makes sense for stock prices to follow the direction of corporate earnings?

I’m sure you already thought this fact was true, even before seeing the statistic above.

Companies are valued for their ability to distribute profits to shareholders. Thus, as profits rise, stock prices also rise.

This is because today’s profit is the seed of future profit growth. The explanation for this is that part of the profit is reinvested and this investment promotes revenue growth and consequently profits. Note that only part of the profits are distributed to shareholders.

Making the analogy with your financial planning, your income is your salary. If you have been working for more than 17 years and earn more than R$5,000, you already had a turnover of more than R$1 million.

However, what was your profit in recent years and what is your profit today?

We must structure ourselves to grow our revenue, reduce costs and thus increase profit.

Our profit is estimated by what we have left over from salary or pro-labore income after subtracting ordinary expenses for housing, transportation and food.

Just like in a company, you must invest in yourself to make more profit in the future.

Investing in yourself means investing in education and financial investments.

Leisure is the part of profit that we might call dividends. Thus, as in a company, it is only done with what is left after the rest has been executed.

Here’s the mistake many make. I know that we all deserve leisure. But, no rational company distributes dividends without making a profit and without making the necessary investments.

After all, do you think it is sustainable for a company to distribute all of its profits or even more in dividends? Or distribute dividends without making a profit? Or make debts to distribute dividends without making a profit?

Undoubtedly, the development of the company that acts in this way would be compromised with this attitude. The same can happen to you if you don’t worry about it.

Many individuals find themselves in the situation of this company, favoring leisure before profit and complain about the uncertainties of the present and the doubtful future.

To improve these points of your financial life, good financial planning is essential.

With this planning it is possible to understand how to improve the current profit, invest for this profit to grow and thus, have a life full of leisure.

Michael Viriato is an investment advisor and founding partner of Investor House.

Talk directly to me via email.

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