When it comes to business and investing, do you feel that you are always struggling? Always thinking what action to take in order to move in the direction that you want? Well, I have. In fact, how can you find your investment flywheel?
Here in this post I will share with you the importance of finding one, and how I crafted mine. 🙂
Single-Solution Solving Mindset In A Multi-Solution World
School Trains Us To Be A Single-Solution Finder
Unlike in our elementary, secondary or even tertiary education where there are fixed solutions to the exam questions. Our real life poses a nearly infinite number of variables. Trying to find the one answer is a hopeless pursuit.
And this ineffective methodology can hinder our progress by being trapped in our own mind. This is regardless of whether it’s due to analysis paralysis or simply because of the fear of taking the next step.
Especially those who are engaged in business and investing frequently, making decisions is a day-to-day activity.
So how can we avoid falling into the trap, and ensure that we are making the right decision?
You Need Models and Philosophies In The Real World
I think one of the ways will be to follow models or philosophies that feels right for you.
Well, there’s many of them that you can subscribe to. And most of the time, you have to do a thorough self-analysis to determine what works best for you.
For instance, deciding what investing strategies alone may already take you months to figure out. Even after you have determined whether to engage in day trading or focus on long term investing, there will still be so many areas to decide where to focus your work on.
Just look at the myriad numbers of things and the uncertainty on what is the best next step to take. This can easily make us put off the work for another day, week or month. Same thing applies to business as well.
Therefore, I want to introduce to you a concept from Jim Collins’ book “Good to Great”. Particularly, the concept of the Flywheel effect. This was based on the evidence and patterns that the author found. He researched and interviewed many different companies which have successfully transformed from good to great.
While the book discussed the Flywheel effect in the business perspective, I think it can apply to many parts of our lives.
Figuring out and crafting our own Flywheel can help us create a mental model of what key elements to focus on. And also help us decide what actions to take in the short term.
Investment Flywheel: The Flywheel Effect
The key idea is that good-to-great transformations never happen in one fell swoop, no matter how it seems to look like on the outside.
There is no single killer innovation, Eureka moment or a single defining action that created an overnight success.
Instead, achieving greatness resembles a process of persistently pushing a giant, heavy flywheel, turn upon turn, building momentum until you reach a point of breakthrough and beyond.
Picturing The Flywheel
Here’s the excerpts from the book Good to Great, describing the Flywheel effect:
Picture a huge, heavy flywheel—a massive metal disk mounted horizontally on an axle, about 30 feet in diameter, 2 feet thick, and weighing about 5,000 pounds. Now imagine that your task is to get the flywheel rotating on the axle as fast and long as possible. Pushing with great effort, you get the flywheel to inch forward, moving almost imperceptibly at first. You keep pushing and, after two or three hours of persistent effort, you get the flywheel to complete one entire turn. You keep pushing, and the flywheel begins to move a bit faster, and with continued great effort, you move it around a second rotation. You keep pushing in a consistent direction. Three turns … four … five … six … the flywheel builds up speed … seven … eight … you keep pushing … nine … ten … it builds momentum … eleven … twelve … moving faster with each turn … twenty … thirty … fifty … a hundred.
Then, at some point—breakthrough! The momentum of the thing kicks in in your favor, hurling the flywheel forward, turn after turn … whoosh! … its own heavy weight working for you. You’re pushing no harder than during the first rotation, but the flywheel goes faster and faster. Each turn of the flywheel builds upon work done earlier, compounding your investment of effort. A thousand times faster, then ten thousand, then a hundred thousand. The huge heavy disk flies forward, with almost unstoppable momentum.
Why The Flywheel Effect Is So Relevant To Our Success
Imagine someone comes over and asks you what’s the one push that caused this flywheel to be spinning so fast. You would be thinking – what an absurd question. Because it’s not a single push, but rather the cumulative effect of the pushes applied upon the flywheel.
This phenomenon describes what we observe in the world today. From the outside, people saw the success as dramatic breakthroughs. But from the inside, those who have been working on it feel completely different. It was more like an organic development process. There’s no single event or action that results in the transformation from good to great.
Amazon Flywheel – Investment Flywheel
Source: Amazon / Flywheel
To illustrate how we can use this concept of Flywheel, let’s take a look at the case study of Amazon.
Author, Brad Stone, of the book “The Everything Store: Jeff Bezos and the Age of Amazon”, explained Amazon’s Flywheel effect during the company’s early days as follow:
“Lower prices led to more customer visits. More customers increased the volume of sales and attracted more commission-paying third-party sellers to the site. That allowed Amazon to get more out of fixed costs like the fulfillment centers and the servers needed to run the website. This greater efficiency then enabled it to lower prices further. Feed any part of this flywheel, they reasoned, and it should accelerate the loop.”
The idea here is that growth is what the company is pursuing. In order to achieve that, there’s many things they can do. By having a central goal, with key elements that drive the growth in a flywheel manner, the result can be exponential. Because it becomes self-fulfilling after some time.
So, whatever decisions management makes, from small tweaks on its website to strategic expansion into different business areas, the flywheel model provides a direction for the people making the decisions. These decisions should feed the flywheel in the direction of growth.
For example, installing more servers to plan for increased traffic down the road will eat into the company’s profit. But it will prepare Amazon to be ready for growth during the internet boom. Hence, between profit and growth, the flywheel will point the company’s executives to the direction of growth in the early days, to capture market share in the online retail industry.
Now you can see why crafting out your own Flywheel can be immensely powerful to help you make day-to-day decisions.
My Investment Flywheel
Source: Carepital / Charlie – My Flywheel For Investing
Just to illustrate, the diagram shows the simple Flywheel I have drawn out for my investment model.
I have chosen a more value investing approach for my own investment as a result.
First of all, I have always been interested in studying businesses. This is so I can learn for both my entrepreneurial and investment pursuits. Hence, it suits my character and what I’m doing better.
Since reading and researching about businesses is of interest to me, it will make the process more enjoyable. Thus, allowing me to find more investment opportunities.
With that, I should be able to boost the returns on my investment (ROI).
As I build up on my portfolio and earn higher ROI, this will eventually allow me to reap more income and returns. Hence, giving me more time and resources to do what I want.
With more time and resources, I can engage in deeper research work. And I will have the ability to pay for more quality data and materials. These will enhance the quality of my research and cumulative knowledge in the areas of business and investing.
Eventually this should allow me to determine more higher quality investment opportunities. And the loop goes on.
That’s why I chose a long-term value investing approach. Because, I find it being a better fit for myself and what I’m doing to create a viable flywheel effect.
That’s not to say that doing short-term trades is not good. You have to determine for yourself and find something that fits nicely for you.
The exercise of crafting out your flywheel will not only help you to be clearer on a day-to-day basis. But also create a coherent strategy that will enable you to reach your goals more optimally.
There can be different flywheels for different parts of your life. Whether it is in business, investment or life in general. And don’t be fixated on coming up with the perfect flywheel. It can be an iterative process. You can always add or remove items on the flywheel as you progress. So do give it some thoughts, and craft one that works for you.
Let me know your thoughts on this, and share with us your investment Flywheel in the comment below.
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Keep learning and happy investing. 🙂