While we all know that straight lines are passe, even compounding – the panacea to the masses offered by the financial services industry – does far less for us than cursory examination would at first seem to indicate, so let’s finish this series by taking a close look at an amazing effect … it’s called:
The J Curve
I am, perhaps, guilty – along with Michael Masterson whom I quoted in this post – of providing the impression that, in order to make your Number, you simply need to ramp up the compounding effect … that is, a larger compounded ‘interest rate’ provides a larger / quicker outcome … all in a nice, neat geometric progression.
DrDollaz states the issue very nicely:
Sometimes I think the assumptions of 50%+ compounded growth rates over long extended periods of time is a little excessive. I own 2 fairly successful small businesses and have seen roughly 75%+ growth in my net worth over the past 5 years if I want to count “conservative” business equity and if that continues, then I’ll blow past my number ($12.5 Million in 5 Years from now will be more like $30 Million in 5 Years!). I just feel that at some point the growth rate is not “as” easily sustainable (although I’d LOVE to be wrong!!! )
But, Michael Masterson’s assumed 50+% compound growth rate for successful business startups is only true when planning your Making Money 201 strategies to reach your Number [AJC: assuming – as it will be for most of my readers, at least – that MM101 won’t be enough to get you there by then], however …
… in reality:
1. You PLAN your approach to your Number/Date by calculating the Required Annual Compounded Growth Rate, but then
2. You ACHIEVE your Number/Date through a series of unpredictable – and, often climatic – events.
The simplest way to explain this is to look at a recent phenomena with this very blog:
I write my blog daily and promote it enough (by leaving comments on other blogs; submitting to the occasional personal finance carnival; and so on) to have hundreds of daily readers; but, every so often, one of my articles is picked up elsewhere and … boom … readership skyrockets!
Here’s what happened to my readership when Kimberly Palmer asked me to contribute to an article that she was writing for US News:
Now, I could not have engineered this result, yet I instigated it by ‘cold contacting’ Kimberly some months ago and contributing this ‘guest post’ … it’s almost like I positioned myself for success, but then it actually came of its own accord!
You can see on the graph the J-curve effect – not once, but twice – as the article was first published in US News … then syndicated by Yahoo! Finance.
And, this is the way Making Money 201 seems to work (yes, the most powerful growth strategy – as always – belongs to MM201): a series of dramatic spikes interspersed by plateaus and sudden drops …
… it’s not a smooth ride to the top, but a hairy roller-coaster ride to (we hope) ultimate success. This is why most people aren’t rich: they can’t stomach the dramatic up’s and down’s 🙁
Looking back on my own career, I realized that my financial and business success could be traced back to three ‘explosive events’ (hence the ‘elbow’ or the ‘J’ in the curve):
– I had been trundling along with my business barely breaking even when I finally ‘hooked’ the big one; a large corporate whose client base matched the demographic of my prospect list, and whose products complemented mine (actually, mine complemented their product set); I picked up two other major clients at the same time: my sales quadrupled in just 6 months.
– Later, I signed a $20 million, 5 year contract that saw me open my business (as the 51% majority stakeholder in a Joint Venture) in the USA; this quadrupled my business again.
– Later still, I signed a series of transactions (so, I guess this was really a series of slightly smaller ‘explosions’) to sell my businesses at excellent, pre-crash, valuations.
Each J-Curve Event produced a 400+% growth spurt, generally followed by a long flat (or even slightly declining, as customers dropped off) period, leading up to the next J-Curve Event, and so on …
… the combined effect over the entire period of owning the business would have approximated a 50+% annual compound growth rate, but I never ran the actual calc’s (since I started with $0 capital, my actual $$$ return is technically infinite, anyway).
So, you need to position yourself to take advantage of all of these different types of curves if you have a Large Number by a Soon Date …
… then just sit back and wait for the explosions
This reminds me of Malcolm Gladwell’s Tipping Point. It is one of my favorite books. He did methodologically mentioned 3 agents for the Tipping Point or the “explosive events”:
And he gave a lot of examples in the book – Hush Puppies, crime in NY, etc. Adrian, were you playing any one of the above roles in your “explosive events”?
@ Mark – without having read the book, I can’t say for sure, but I’m tipping [pun intended] that it was ‘salesman’ 😉
BTW: I did just read his latest book “Outliers”, which I can only describe as ‘weird’ …
I haven’t read it myself- but from this article:
It seems that The Black Swan makes a similar point. I may have to add it to my to read list.