When I first talked with the CEO of our production company, I was extremely skeptical of the returns he offered.
“For three years? Sure! Easy as pie.”
“So, 25% each year? Not in total?” I asked doubtfully.
“There’s no way. That’s not normal. That’s… impossible.”
“Why?” he asked. “Have you ever bought a cup of coffee at a coffee shop?”
“What is the profit margin on that coffee?”
Considering a cup of coffee costs about 30 cents, and tack on a ton of overhead for their costs of labor, the building, electricity, marketing, insurance, gas, etc., it is still extremely realistic that there is a 100% (or more) return on purchasing a cup of coffee at retail prices.
Of course, the list goes on: Bottled water? Produce sold individually when a retailer purchases it by the pound? A shirt from a high end retailer? All of these items can have exceedingly high profit margins that will make a typical credit card feel insecure about how little money it can bring in for a bank.
In short, your average person participates in these types of returns every day. Giving companies 50%, 80%, 100% or more on products and services. We don’t even blink. It’s “normal.” The same goes for product sales. Have you, dear reader, ever purchased something at 50% off? Which means the company is making money on a pair of jeans at $120, and are also making money on a pair of jeans at $60, yes?
Here’s a fun experiment for you: What’s your mental limit on financial returns?
- 0% to 5% (savings accounts, CDs, and high end money market accounts)
- 6% to 12% (typical stock market averages, car loans)
- 13% to 25% (credit cards)
- 26% to 40%
- 40% to 80%
- 81% and above?
One of the challenges of thinking beyond 10% returns, is that very few of us have a legitimate way to conceptualize how to capture that type of money. Maybe, maybe, we have that in an IRA (which we cannot touch for another thirty years or more). For your average person, however, such financial means are, in their mind, non-existent.
Here’s a story.
After I signed my first contract (25% APR over three years), I made the mistake of telling my friends about my newfound glory.
“Bro, that’s a Ponzi scheme,” one of them said flatly.
“You did what? You’ll never see that money again. Sorry man, you were swindled.”
“Anything over 8% isn’t real. You can’t get those types of returns.”
Thier mental limit was clearly under 10%. My first check had already come.
Here’s another one.
I recently talked with my brother about the returns he can get with us. He owns an insurance agency and has more than enough cash sitting in his business checking account getting eaten away by inflation.
“Hey man, if you want, I can get you 20% APR on some of that cash. If you took just $30,000, that’s $12,000 in your pocket! $6000 a year for two years and a $30,000 back to you at the end of the term.”
“Jay, I could hire another employee for thirty grand who will make me far more than $6,000 a year.”
Different mind, different limit. For one person, 8% was a stretch. For another person, 20% over two years on tens of thousands of dollars was plainly unimpressive.
Want to know something crazy?
Truly wealthy people (accredited investors) think in multipliers. How can I get a two, three, four, or ten times return on my initial investment? Right now I am training my mind for that to be “normal.”
Because I want a 25% APR to be, at the very best, average.