01 Aug 2010 | Opinion

The Power of Numbers 

Successfully combining high volumes with excellent products and service is challenging, explains Robert O’Riordan.

The old Scots saying 'many a mickle makes a muckle’ – lots of little things add up to something big –  is a close cousin to one of our nation's north eastern favourites ‘count the pennies and the pounds will look after themselves' (unhappily recently more honoured in breach than observance).

The power of numbers and the effect of volumes are often underestimated. Captains of ships or pilots of aeroplanes dread the moment when everyone on board suddenly makes for one side of the boat or one end of the aeroplane. While systems can cope with predictable and evenly spread out movements, if everyone decides to do the same thing all at once then chaos can quickly follow. Polling stations find themselves inadequately manned and call centres leave the customers trapped and stranded in ugly and angry queues.

In business, rarity or limited supply can be something to be exploited. Providing items in short supply at a high price and at a low volume can be good business. However, this end of the market can only cope with so many Rolls-Royces or Aston Martins. Increase the supply and the desirability quotient declines.

Combining mass production with high demand and good margins does, however, make a good and possibly better business. Scale up and fulfil supply while growing demand rapidly and maintaining a competitive advantage. Here, execution is everything – if you have to wait too long for the latest iPhone or iPad or the well-promoted low cost broadband service, then the danger is you might well give up or go elsewhere. From a business perspective, catching the trend early and combining the first mover advantage with capable fulfilment and delivery, (sometimes having to cope with unexpectedly high volumes) can make or break companies.

In the world of investment and speculation (which are arguably cousins), volumes and surges move prices. In markets, everyone does seem to move to one side of the ship at the same time so creating short term imbalances, sometimes precipitating crisis, repeatedly feeding different bubbles and for the canny investor providing opportunity.

When he sees a queue, the canny investor, as opposed to the rabid speculator, might well hold back and wait until demand subsides before making the decision on whether or not to place an order. A joy of markets is that there never seems to be a shortage of opportunities. Miss one bus, catch another. Conversely when the entire world hates a stock, currency or commodity, the canny investor may choose not to move with the herd and instead strike a bargain amidst others' revulsion. This way large fortunes can be made but preserving detachment, maintaining objectivity and remaining patient in a crowded and excitable marketplace, where emotion itself drives the pace, is of course, not straightforward. In markets it is perhaps better to stand at some distance from the crowd or herd and observe its patterns and movements rather than be sucked into its vortex. While there can be safety in numbers, sometimes it may be best to stand alone.

Robert O’Riordan is responsible for liaising with investment trust boards at Baillie Gifford and for communications with shareholders.