We celebrate Independence Day and our freedom to live and speak as we wish without the rule of a foreign power. But what do we do with that freedom. How can we prosper in a free country? This article is about how to achieve financial independence. We achieve financial independence through hard work and profitable investing. The stock market is typically the best way to multiply your investment capital. Learn how to invest and start on your road to financial independence.
Learning how to invest successfully can pay dividends for a lifetime. In learning how to invest an individual will learn about types of investments and how to approach them. Just as importantly learning how to invest well teaches a brand of discipline that leads to benefits in all parts of life. The investor will always ask himself “what is a good investment,” “what are safe investments,” and “what is the best investment for my money?”
In choosing the best investment for his money a beginning investor needs to think of having a stable platform from which to invest. Simply speaking this means paying off credit card debt and having sufficient cash reserves for mortgage payments, food, utilities, and other needs sufficient for several months. Then the beginning investor needs to develop sufficient amount of cash for investing and start looking for investments. In this regard how to start investing in the stock market may be to put $50 into a mutual fund every month or it may mean picking new winners in the stock market through research and observation of the stock market.
Stock investors and traders achieve financial independence by learning both fundamental and technical analysis of stocks. Technical analysis helps investors buy low and sell high as market sentiment move prices higher and lower. Fundamental analysis helps investors spot the intrinsic value of a stock.
Intrinsic stock value is its fundamental value. It is obtained by adding up predicted future income of a stock and subtracting current price. It can also be seen as actual value of an equity versus its book value or market value. The concept of fundamental analysis of equities evolved from this concept. Using fundamental analysis the intrinsic value of a stock is the expected company cash flow discounted to current dollars. It is a discounted cash flow valuation.
How to achieve financial independence by investing in the stock market requires that you select the right stocks, ones that are underpriced compared to their ability to generate long term cash flow. This is the point of the intrinsic stock value calculation.
Buy and Hold versus Timing the Market
The most spectacular gains in stocks come from predicting that a stock like Microsoft will increase in value by more than a hundred-fold and then predicting that that same stock will take a hit during the dot com market crash and level off to be a solid dividend stock. But this requires market timing which can be tricky. Successful investors like Warren Buffet only invest in stocks that they understand. Buffet has said that he avoids high tech stocks because he does not know what they will be worth in a year. By comparison he has a good idea what a snickers bar will sell for or how much money a railroad will make hauling freight. The most successful investor in the world sticks with stocks that he understands and has long ago achieved financial independence. This can be your plan for financial independence too.