The word freedom can mean many things to many different people. My definition of freedom is doing whatever a person wants at any point in time and not having to worry about other commitments that would hold them back from doing so. We as American's sometimes take our freedom for granted but one thing is for certain, we need money to do almost anything. This puts us in a position to be tied down to an employer, personally owned business or any other time consuming method of earning enough money to do many of the things we enjoy in life. What if you did not have to work? What if you did not have to wake up every morning 5 days a week at 5:30 in the morning to your alarm clock blaring? What would you do with all of that time instead of making someone else wealthy? Don't get me wrong, their are many people out there that love their career and wouldn't trade it for the world, but what if your not one of them? Investing your money in quality companies is a proven method of working toward this goal. I personally know a man who was earning a middle class wage and was consistently contributing to his investment accounts when one day he decided he had enough of "punching a time clock" at the age of 48. He is now 64 and has been taking two to three vacations a year anywhere in the world he desires. Keep in mind, he was living below his means while working and is living life no differently in that regard now. With that being said, I would like to look at just a couple of ways to make this "dream" of financial freedom a reality and even exciting along the way.
There are endless possibilities to accomplish this but I am a strong believer in consistency and hitting single after single instead of swinging for the fences hoping for a home run. Although I know the latter can sometimes be much more exciting, it can be very risky and at times make you take one step forward only to go two steps back.
This leads me to the power of compounding over time. Think of it as when you were a kid, packing snow in your hand then rolling it on the ground through more snow to help it accumulate more and more until it has grown so big you can hardly move it anymore. Another example would be if you had one penny and could make that penny double everyday for thirty straight days. (I realize this is an all but impossible task but let your mind think outside the box for a second.) Do you realize on day 30 that very penny would be worth over 5.3 million dollars? Trust me, when I first heard this I thought the same thing, "No way that is possible". Go ahead, get your calculator out and do the math, the text on this screen will still be here to pick up where you left off. The point is, although it does not seem too appealing when you first start out investing because the dividends and capital appreciation seems petty, the rewards of staying the course can pay off handsomely. Take for example Berkshire Hathaway (NYSE:BRK.B), (NYSE:BRK.A). Warren Buffett has done something with this holding company that may never be replicated. He didn't invent the light bulb, iPod or secret formula for Coca-Cola (NYSE:KO). He merely kept turning one dollar into two and so on. This is no easy task to earn an average of 20 plus percent over the last five decades like he and Charlie Munger have done but it does show that you do not have to be a brilliant inventor of something to become very wealthy. This is a security that one could consider investing in for several reasons but the one that many overlook is that this is like investing in a S&P 500 Index Fund. The difference between the two is Berkshire Hathaway is like the All Star team of companies that does not charge a management fee like an index fund. I know one of the drawbacks investing in this company is that there is not a dividend paid out like an index fund but until the day comes where the ROI is better paying a dividend that you pay 15-20% tax on versus using it to purchase more income producing investments, I prefer it to be reinvested by Mr. Buffett.
Another company that has done extremely well by investing its profits back into the company and for the most part growing entirely organically is Fastenal (NASDAQ:FAST). I use this company as an example of staying debt free and not squandering away hard earned money to interest payments on various types of loans. Debt can postpone obtaining your freedom from the working world very easily as it seems that the "American Way" is to earn $1 and spend $2. If most people realized how much today's dollar being spent was actually costing them later down the road had they invested it, some may think twice before purchasing something on their credit card that may get used for 2 months and tossed in a corner. Fastenal has shown living, or in their case, running a business, within or below your means is a very important piece of the puzzle. This is one of the many reasons Fastenal has been the best performing stock since the 1987 stock market crash with a 38,565% return not including dividends. That is very impressive, but I find the most impressive and interesting part of this is if you asked 100 people what stock has done this (excluding full time money managers) I highly doubt you would here one of them mention this name. It was almost like this was a stealth stock flying under the radar. It is recognized that the stock is usually priced for perfection given its five year average P/E multiple of 30.9 compared to its peers at roughly half that but given the companies consistent performance over the long term and proven management, I would consider this a wise investment. They do not pay a bountiful dividend, 1.6% going forward as of yesterdays announcement, but this is a little icing on the cake of a quality growth company.
Berkshire Hathaway and Fastenal are just a couple examples of "tools" that can help you achieve your financial freedom. There are many other investments that can help toward this goal but starting early, limiting trading fees, management fees, tax and any other frictional cost that can nibble away at your portfolio, are an absolute must.
I know this article may seem boring to some because there are not any graphs or number crunching exercises but my intent with this and future articles is to go over basic investing principles and put them into prospective for the average investor, like myself.