Monday, May 26, 2014

#36 Owning a good company is better than working for one.

"Investors should be rewarded for actually owning companies and gaining returns on their investments." - Mark Cuban

My father and I were discussing wealth creation the other day and he asked whether I knew any multi-millionaires.  Having studied and worked in the Oil Patch in Calgary, I've come to know personally a number of wealthy people with very high net worths, some well into the 10's of millions.  Calgary is a vibrant city with lots of opportunity, and a lot of money moving around within it.  If there is anywhere that rewards calculated risk-taking, it is Calgary.  The overwhelming majority of folks I know who are wealthy did not become wealthy from earning a paycheque.  They became wealthy from either starting and operating businesses or by investing in, or acquiring shares of, companies that go on to be very successful.  I asked one of my high net-worth friends what they their best piece of advice was to generate wealth.  He said it was simple: "Owning a good company is better than working for one"...  i.e. Their key to wealth creation was owning businesses, not working for them.  This flies in the face in what the majority of the school system teaches... to become an employee and rely on a government pension.

The rationale for business (or stock) ownership is this: A paycheque is temporary and you are compensated only in exchange for your labour.  You get paid for the work you do once, but if you stop you get nothing in perpetuity.  Owning a well-run business, or shares of a one, can result in passive cash-flow in the form of dividends and tax-deferred capital appreciation as the business grows for as long as you own your share of the business.  This is one of the reasons I don't understand why people don't take advantage of work-sponsored share matching programs.  Getting shares in a successful company at a discount sounds like a great thing to me....then to benefit from that company ownership for a long time, perhaps long after you've left the company, just seems like a solid way to build wealth to me.  Buying shares privately in an RRSP, TFSA or Taxable account also make sense if you take a long term approach and pick solid companies that will still be around in 10-20 years.  Its not as hard as it sounds.. really.

Taking on the risk of business or company share ownership can lead to sizeable rates of both capital and cash-flow growth.  Growth rates of good companies tend to outpace inflation, and dividends can grow well above the rates of paycheque raises.  Rather than start a business, we chose to invest in companies that had a track record of growing their earnings and increasing their dividends AND ones we think will continue to deliver raises above the rate of inflation.  We regularly get dividend income raises far greater percentage-wise than employment income raises these days.. which means our investments are now bringing us closer to Financial Independence than our paycheques.   Since the rate of growth of our portfolio's dividends alone outpaces our employee paycheques growth, we have put as much as we can into them as early as we can.  This allows the compounding to work in our favour early.

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