A few days back I had written a post on this topic. I have been working on seeing how the same money, multiplies itself just based on the velocity it can get.
FMCG companies are a perfect example of creating wealth due to the velocity of cash.
On a typical tube of toothpaste or a bar of soap, each of these companies only makes a few cents. But because they sell to the distributors in bulk and realize their money, they invest it back again in making more and selling more.
Their model is primarily driven by volume even though the per unit margin is very low.
If you look at these companies they generate so much cash, they give out such huge dividends on a consistent basis only because of their ability to generate velocity on the cash.
Cash if it’s kept stagnant in your home cannot generate wealth. Wealth can only get generated when cash keeps moving. If it’s moved into consumption items then it generates wealth for that entity. If it’s moved into productive items, then it will create wealth for you.
One of my philosophies of buying stock , similar to Peter Lynch, is to buy stocks of companies whose products I consume, so that some of the money that I spend comes back to me in dividend and capital appreciation.
Till next time then.