Key Characteristics of Achieving Financial Freedom

Yesterday, we talked about the common misunderstandings people have about personal free cash flow and concluded that if someone can survive two cycles in investment banking—roughly 15 years—and go through two major stock market crashes, they will have achieved financial freedom. Today, we will pick up from that point and discuss the path to personal financial freedom. If you observe the career choices of individuals from wealthy families, you’ll notice many of them choose to join investment banks. Similarly, talented graduates from ordinary backgrounds often see investment banking as their top career choice. In reality, a career in investment banking is no easy feat; it is grueling in the early stages, and the attrition rate is high. So why do so many people still rush to join this industry? The answer is that after struggling for more than a decade, surviving the tough early years and economic crises, the road ahead becomes smooth and stable for the rest of your life.

How Do People in Investment Banks Make Money?

First, let’s take a look at how people in investment banks make money. Investment banks differ from regular banks. Before the 2008 financial crisis, they weren’t even considered banks but rather investment firms managing money for the wealthy and institutions. It was only after the crisis—due to concerns about risky financial operations—that they were reclassified as banks for better regulation. However, their business model did not change; they still don’t accept small individual deposits. Instead, they invest money from wealthy clients and institutions, charging an annual service fee ranging from 0.5% to 2% of the assets under management. It’s easy to imagine that if your team manages $1 billion in assets at a 1% management fee, that would generate $10 million in annual revenue. With relatively low costs—perhaps around $2 to $3 million—the remainder is free cash flow for the team. Although not all teams manage such large sums, even managing $300–$500 million can generate significant income; typically, it takes just 10 to 20 clients to accumulate that much. If you manage well and earn an 8% return for your clients every year after fees, their assets will double every 10 years, and your management fees will grow proportionally. However, in the event of an economic crisis, the assets managed by many investment banks can lose half of their value. The loss is borne by the clients, while fund managers do not lose a penny. Of course, many clients will want to withdraw their funds in such cases, and many fund managers may lose their jobs. Yet the withdrawn funds eventually return to the financial market, giving those who survive a chance to manage double the funds, resulting in double the cash flow. As long as you hang on—whether you are a fund manager or a wealth manager—you’ll earn a fortune, and this cash flow keeps coming in every year. You don’t need to do anything extra; your clients’ wealth just grows as the stock market rises. In other words, whether you’re sleeping or on vacation, cash keeps flowing in. Viewed this way, working in investment banking seems like a great business with guaranteed income and free cash flow that just keeps coming. However, as with any lucrative opportunity, the competition is fierce. Even heirs from wealthy families compete for entry-level positions, and whether you survive depends a lot on luck. Moreover, with computers assisting in trading, the number of new hires in investment banking keeps shrinking, making it harder to get in.

Key Features of Achieving Financial Freedom

We used investment banking as an example to illustrate the characteristics of ways to achieve personal financial freedom.

First, the longer you work, the more cash flow you generate. Wealth managers and investment banks achieve this because assets typically continue to appreciate over time even if you do nothing. As you survive through several market cycles, you’ll end up managing more and more money. Many people face a midlife crisis at age 35, feeling that they have lost their competitive edge in the workforce. However, in the investment field, the older you get, the more valuable you become. This pattern is similar to industries such as healthcare, law, and accounting in the US. For example, healthcare professionals—including general practitioners, dentists, and ophthalmologists—may have few patients when they are new, but after a few years, with a good reputation, their patients become loyal. I have had the same family doctor for 15 years and the same dentist for 15 years, and an optometrist for 20 years. Once these professionals have a steady stream of patients, their cash flow keeps coming in.

Second, you must have a core competitive advantage. In investment banking, whether you can survive financial crises depends on your investment returns and risk control abilities, which are the most important competitive factors. Although this may sound simple, it is extremely difficult in practice. Often, if a fund manager experiences two or three years of good returns, they may feel invincible and start taking riskier moves or altering their strategy, which can lead to failure during a financial crisis. Many people cannot overcome their own greed; the success or failure of an investment often depends on human nature. The technical aspects of investing are not hard to learn, but overcoming personal weaknesses is something that many people never manage to do, and consequently, they are eliminated.

Third, a stable cash flow job is generally independent of the economic cycle. Most professionals in stable fields earn income that is not heavily dependent on economic fluctuations, even though investment banking income does fluctuate in the short term. In the long run, there are both good and bad years, but if you survive, your future earnings can be even higher. At least, we do not see any instance where an entire industry disappears after a financial crisis. Jobs without stable cash flow tend to be more affected by economic cycles. For example, consider how different the tech products we use today are from those of 10 years ago; people who relied on outdated technology must retrain or leave the industry entirely.

Before I conclude, I’d like to share my father’s experience. By today’s standards, he might not be considered absolutely wealthy, but to some extent, he was financially free—as long as he didn’t spend extravagantly, he didn’t need to worry about money. His primary source of income wasn’t a salary but royalties from patent transfers. I remember that every time he transferred a patent, it generated a new stream of income that lasted for many years. As his patent portfolio grew, his royalties increased, and it truly felt like he was making money even while sleeping.

Conclusion

In summary, the key points regarding financial freedom are as follows:

1. Free Cash Flow: Financial freedom is essentially having free cash flow far exceeding your expenses, so you never need to worry about money, and ideally, your wealth keeps growing.
2. Continuous Income: Just having paper wealth or a high income is not enough; you need a continuous flow of cash that does not require additional investment.
3. Competitive Advantage: To achieve personal financial freedom, you must secure a unique competitive advantage so that the work you do becomes more valuable over time, with minimal impact from economic cycles.
4. Overcoming Additional Investment Costs: One often overlooked aspect is that additional investments can erode your income and profits, potentially leaving you with nothing in the end.

These features, exemplified by the investment banking model, illustrate a pathway toward personal financial freedom.