People often ask about my CAGR. To be honest, two years ago, I didn’t even know what this term meant.
I see everyone is so obsessed with CAGR that many forget the core purpose – earning money.
For a trader, CAGR is not always a great indicator of performance. It may be good for long-term investors or mutual funds, but not for those who actively churn capital and rotate money. I might be wrong but in my view, turnover and profit/earnings matter the most.
That reminds me of the story of a young, poor Marwari boy who captured the sugar market in his town.
Story
There was a young, poor Marwari boy who wanted to start a business but had very little or no money. For some reason he decided to sell sugar, so he borrowed money from his father—just enough to buy one sack of sugar. He went to the market, opened the sack on the roadside, and started shouting, “Sugar, sugar, sugar!”
No one stopped. Those who did stop did not buy, because his prices were not better than other traders in the market.
Before going to the market the next day, he carefully noted the prices at which others were selling sugar. Then he matched their rates and started shouting, “Sugar X Rs/kg, sugar X Rs/kg!”
This time, a few people stopped and some even bought. But he still could not finish selling the entire sack in two days.
That night he thought again. He decided to reduce his price to a level lower than anyone else in the market.
The next day, he went back and shouted his new rate. This time, many people stopped, and many bought sugar from him. He managed to sell the entire sack.
Soon, other traders also began lowering their prices. But this boy kept cutting his price all the way down to his cost price, with one condition: he would not sell more than 10 kg of sugar to any single person.
With this strategy, he started selling 20–50 sacks of sugar every day.
Other traders saw that there was no margin left in sugar, so they quit and moved to other businesses. Suddenly, the boy’s sales skyrocketed. He began selling more than 100 sacks of sugar per day, now with a slightly revised condition: no more than 20 kg per person.
One day, when he went to return the borrowed money, his father asked:
Father: “Tell me one thing. You are selling sugar at the same price you buy it. Then how did you manage to make this money?”
Boy: “It is not the sugar price, but the huge turnover that is helping me. And yes, till now I am not really earning much from selling sugar. But soon I will, because now there is no competition and I can increase my prices.”
Father: “I still don’t understand. If you are not earning, how are you able to return my money?”
Boy: “The empty sugar sacks. I sell those sacks to a sack trader every day after closing my shop. The sacks are my profit margin right now.”
Moral of the story:
Big turnover with a small margin is far better than small turnover with a huge margin.
Never underestimate Marwari people 😛
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