So far in this series on the seven mathematical factors that form the basis for multiplication vs. fractionalization, we’ve covered the first three…
- Profitability: The measurement of gain back to you after all costs of making that gain have been deducted. Although everyone reading this knows what a profit is, it’s very often true that a lot of folks don’t factor in all costs. One of the most commonly overlooked costs is known as the “opportunity cost”, which simply refers to the opportunities you are missing by being involved in the current transaction. BY virtue of investing your capital in one venture, you may well have ruled out the ability to invest in another.
- Velocity: This factor answers the question “how long will it take before I get my initial investment and profit back?” The faster the velocity, the easier it is to work on lower profit margins. A 1% profit is pitiful, but if it were possible to stand in front of an ATM and every time you put in $100, it would spit out $101 within seconds, I’m guessing it would be very worthwhile to stand in front of that ATM all day and make 1% on every transaction.
- Scalability: This factor refers to the gross potential of the opportunity. For example if you can flip a house and make $30,000, that’s fine, but whether there are enough opportunities for you to choose this as your new business is another question. Are there enough opportunities to do this as often as you like for as long as you like? Maybe you have a business that works well locally, but can you replicate that business in other markets?
The fourth factor is Frequency
It is similar, but not the same as the 3rd one. Frequency asks the question, “How soon can I do this transaction again and how often?” Perhaps the best illustration of how people have and are making vast fortunes right now by capitalizing on the frequency factor is what is known as “high frequency trading”.
High frequency trading rapidly trades securities (stocks, commodities, etc.) on the various exchanges using sophisticated computer technology and algorithms to get in and out of trades in seconds or even within fractions of seconds. The speed at which they move only allows them the smallest of profits, sometimes just a fraction of a penny per trade. What makes it work for them however is FREQUENCY. They can do this thousands of times a day while sipping on their coffee and reading the morning news.
The profit factor per transaction looks ridiculously small, but they don’t care. They have velocity because the trades are lightning fast. They have frequency, because this can be replicated every second of the day depending on how wide their investment portfolio is. And they have scalability. When you take into account currency trading, there are literally trillions of dollars of currency, stocks and commodities being traded daily. This business is vastly scalable.
So now the question comes to you if you are not a high frequency securities trader, how can you take advantage of that mathematical factor for creating wealth through multiplication vs. fractionalization? Remember, multiplication is not the measurement of any one factor. It simply requires multiplying your capital within a one-year period. So, if you double your money in a year, you’ve multiplied.
On a personal note, I have always found it easier to double something when I was shooting for a much higher goal because the larger the goal, the bigger you have to think and the easier it becomes to double your investment.
Years ago, I had a small regional bank with multiple locations as a client. They had just had a record year for them with $70 million of their major transaction type done in that year. When they approached me, their goal was to hit the $70 million again in the New Year. I told the bank president that if I was going to help them, they had to have a goal that moved me as well.
I told him $100 million could get my creative juices flowing. We then pulled the branch managers into the boardroom for a serious planning meeting for the New Year. They were all geared up to try and reach the same number as the last year and I was about to burst their bubble. I looked at them straight in the eye and told them we needed to plan out how we could increase that number using multiplication.
I only wanted a five times increase which would have meant doing $350 million in the New Year. You should have seen the look on their faces! We then began brainstorming on the white board ways in which we could succeed at that goal. After about 30 minutes of stretching their brains, I said that maybe we were shooting too high and asked them how they would feel about just doubling last year’s numbers.
They were very relieved and suddenly optimistic. It is true that they did not actually double those revenues in the next year, but they did blow through the $100 million mark. If you don’t aim high, you have no chance of achieving high. Having said that, aiming high is not a guarantee of a high result. You must have the real possibility of hitting high numbers as well. Hopefully in my next blog I will share the fifth mathematical factor that speaks to this issue.
Until then, be fruitful and MULTIPLY!