The Magic Formula and 3 Secrets To Ridiculous Success (In Almost Anything)

Google’s Domination, Warren Buffett’s Wealth, and Why The Kardashians Just Won’t Go Away.

However you define success, there are many ways to achieve it. But for truly, ridiculous success, from Google to Warren Buffett to Amazon to the Kardashians they all follow ONE deceptively simple magic formula. While the focus of the article is on business and investing, it can surprisingly be applied to many aspects of peoples’ every day lives. Your personal finances, your marriage and relationship and even learning a new skill can all use this formula. The Magic Formula is:

It’s the formula for compound interest. The results for any project or investment are based on your initial investment (monetary as well as time, social and emotional capital) the annual return (monetary as well as emotional) that you get on that investment and the years that you’re investing. In terms of ridiculous success, very few things happen overnight. Ten years seems to be a pretty good hurdle for ridiculous results and coincides with Malcolm Gladwell’s concept of 10,000 hours of purposeful practice for success.

“Compound interest is the most powerful force in the universe.” “[it] is the eighth wonder of the world. He who understands it, earns it… he who doesn’t… pays it.”
-Albert Einstein

This formula can be applied to your personal finances (be frugal to save and invest at a young age), your friendships (spend time develop and maintaining strong friendships that last a lifetime) and of course companies and investing.

The Three Secrets

Secret #1: Maximize The Amount of Your Initial Investment

To accomplish anything great usually takes a large initial and ongoing investment. The greater that you can contribute the greater the potential outcome. You can start with your own money and savings, but you can also use OPM (Other People’s Money) from debt, friends & family, investors, venture capital, etc. Time and emotional capital are usually the other big resources that you have to invest. Not surprisingly, people that are more focused are often more successful since they are investing more time than their peers. You can also contribute your social capital & relationships.

Secret #2: Maximize and Sustain The Annual Rate of Return

Sustaining a high rate of return is perhaps one of the most difficult things to do in business and in life. Generally most projects, people and investments can show some early promise before fading. In business, to maximize your return you usually have to do a combination of the following: A) innovate and do something different that B) that solves a problem that customers will gladly pay for and C) usually leverages existing tools & systems.

But, innovation and success almost always brings competition and lower returns. Maintaining high returns requires the creation of barriers to entry. In business, this often takes the form of: A) patents, B) economies of scale, C) network effect or D) brand power. From a corporate standpoint you also need great people and create a culture where employees don’t leave. Employee retention is an undervalued asset in sustaining a high return as it: A) keeps your most productive resources and B) results in less competition as your trade secrets go out the door when your best people leave.

By focusing on maximizing and sustaining returns, you create a culture of execution and a habit of winning.

“The chains of habit [both good and bad] are too light to be felt until they are too heavy to be broken.” -Warren Buffett

Secret #3: Invest Early and Pick A Market With A Long Runway

As Einstein has said, compound interest is an incredibly powerful force that is underappreciated. That’s especially true in today’s world of immediate gratification. Great things take time whether it’s a startup, your friendships, your marriage or playing a sport or instrument. The amazing thing is that for high companies like Google, Facebook and Amazon, they made more money in the last 12 months than they did in their first 12 YEARS. The founders picked opportunities with large and growing markets.

Case Study

How Google Used the Magic Formula

Google was not the first search engine or even the second or third. In fact, the company was founded in 1998, eight years after Archie, the first basic search engine.
Maximized their investment: Google’s co-founders (Larry and Sergey) leveraged their time and network as graduate students at Stanford to amazing effect. They met in 1995 as graduate students at Stanford and launched the school’s internal search engine (google.stanford.edu) in 1996 developing precious experience and credibility prior to becoming a formal company in 1998. They were focused and leveraged their relationships within the Stanford network where early investors were alumni and professors. They also raised $25m in venture capital within a year of incorporating, which was a huge sum at the time. They plowed the money along with the ensuing profits back into the business.
Maximized their return: Google harnessed a lot of existing resources that had been mispriced. They leveraged the human insights contained in backlinks of web pages which were free and served as the foundation of their search engine. They also leveraged the massive distribution of Yahoo at its zenith as the Web portal made a disastrous decision to PAY Google for their search services. Yahoo also had the option to buy Google TWICE for pennies of today’s price: once in 1998 for $1m and again in 2002 for $5 billion.
Sustained their return: Google has been able to sustain their high returns on investment due to do numerous high barriers to entry including: A) A patent on PageRank backlink search B) the continued rapid growth of content since their founding and C) economies of scale. Outside of labor, cost of customer acquisition is the single highest cost for any Internet business and their costs are among the lowest.
Invested early and long: Google will be coming up on almost 20 years in the business. While their growth and returns are slowing the future continues to look bright.

To Be Continued…

There are countless examples of this Magic Formula being applied. In fact, I thought there could be enough interest in this topic to make it a multi-part series. Warren Buffett, Amazon, the Kardashians and the personal application are topics that we will explore in more detail. Like any good startup, this article is my Minimum Viable Product(MVP) for this series. So, if you found this article interesting and want to see more like it, please like it by pressing the 💚 button on the side or bottom.

How I’m Applying The Magic Formula

Over the course of my career, I’ve had some pretty good highs but also my fair share of setbacks. By no means have I been ridiculously successful. But,this is the formula that I wish I had appreciated when I was younger. I embrace it now professionally. I’m also embracing it in my personal life as I’ve gained a deeper appreciation over time for my friends and family and realize that these take large and continued investments in time, but have great rewards.

Professionally, I’m making a ten year and longer bet that fundamental investors will increasingly embrace technology for analysis. The startup that I founded, Quantavista Labs, is the vehicle that I’m currently using to express that view.

One More Thing

If you found this story interesting, please hit the 💚 button below, tweet and share the post. Also, follow me to get to know about my future posts on Medium. If you want to know more about Quantamental Investing, check out “What is Quantamental? The Definitive Guide and FAQ” or “The Quantamental Investing Buzz”.