Preamble: I wrote this post in 2013, about how the poorest of the poor are often the best at generating a return on their money. I think it’s still true, and worth re-sharing.
Every so often, I log onto Quora to see what questions the world is asking. This particular question was top of my newsfeed, and it had 823 people following it for answers*.
*Which is very impressive by Quora standards – most of the questions I see have, like, 9 people asking the same question.
Here was the most upvoted answer (2.4k votes – even more impressive):
So I liked that answer – but it’s heavily biased in favour of the up-skilled.
Then, of course, there were many of the “Invest in yourself!” and/or “Buy something for someone that you love!” responses. Which aren’t especially original.
The entrepreneurial amongst us…
Here are two other answers:
Here is why: How The Poor Survive
Some time ago, I read “Poor Economics” by Abhijit Banerjee and Esther Duflo (and then wrote about it here and here). One of the things that they talk about is these poor Indian mothers that buy goods and then re-sell them to support their families, all the while borrowing money at punitive rates of interest.
- A poor Indian mother has no money.
- So she borrows, say, $5 to be repaid by the end of the day.
- It has to be repaid at $6 including interest.
- By the end of most days, she has enough money to cover her family’s food (let’s say that she spends $3 on food).
- She repays her loan with interest.
- The next day, she starts again with no money.
So: she has to make $4 a day in margin ($3 for food, $1 for interest) off $5 in borrowed money (and her own sweat).
That is a Return on Investment of 80% – in a day.
Sure, in absolute terms, it’s not very much at all. But almost no company can claim to be making that kind of ROI.
And how does she generate that return?
Two basic things:
- Repackaging; and
- She buys a box of teabags, and then sells the teabags individually.
- She walks 10km to buy the box of teabags from the store, and then brings them back to her roadside spot.
According to Poor Economics, it’s how many of the poor entrepreneurs do it. They buy in bulk (because for a poor person, even a box of teabags is buying in bulk); and they can walk.
And it’s also why, for all the tongue-in-cheekiness of those second two answers, I think that they’re the ones that come closest to the truth.
If you really want to learn about high returns, you should learn from the poor. After all, they have to generate them every day.
Rolling Alpha posts opinions on finance, economics, and sometimes things that are only loosely related. Follow me on Twitter @RollingAlpha, and on Facebook at www.facebook.com/rollingalpha. Also, check out the RA podcast on iTunes: The Story of Money.