Tuesday, June 29, 2010

The growth curve of highly successful businesses

Since trading is a business, it makes sense to look at business management books now and again. David G. Thomson’s Mastering the 7 Essentials of High-Growth Companies: Effective Lessons to Grow Your Business (Wiley, 2010) doesn’t have a lot to offer the individual trader. But here’s an interesting takeaway.

More than 60% of the companies that went public in the last three decades no longer exist; 4% now have more than $1 billion in annual revenue. The highly successful 4% have a common growth curve. First, an entrepreneurial phase where an idea is transformed into a viable business model and growth is modest; the average length of this “runway” is five years. Second, an inflection point “where revenue breaks out into an exponential trajectory.” And, finally, variable growth rates to reach $1 billion in revenue.

Ratchet down the dollars, but the growth curve (or equity curve) of highly successful traders should be somewhat similar. Lots of time figuring out a personal style and an edge, honing the craft, and carving out modest profits. And then, with very careful money management, increasing size and letting the powers of compounding work their exponential magic.

But doesn’t this presume the best of all possible worlds? No, according to Thomson. A “bad” market environment is no excuse for a major drawdown in the equity curve. “America’s exponential-growth companies . . . have a consistent track record of growing through recessions.” (p. 23)

What separates the winners from the losers? Although almost all companies had passionate management teams, the failing companies, Thomson contends, demonstrated “blind passion—they never knew when to quit. . . . These teams fail to self-correct.” (p. 21) In brief, we’re back to the themes of flexibility, agility, nimbleness. Only traders who are flexible, who can self-correct, stand a chance of joining and staying in the top 4%.

No comments:

Post a Comment