Apr 26, 2020 8:31 am
Hope you and yours are keeping safe.
I'm back again with the most thought-provoking articles I've read in the week (if you missed my previous newsletter, you can find it here).
This week is about creating wealth (if only it were so easy).
First, we look at how to channel luck our way. Naval Ravikant explains how we can bribe Lady Luck (or at least gently influence her) to favor us.
It comes down to two specific things - measurement and leverage. That's what Paul Graham talks about next.
And third, two surprising insights about the power of compounding.
Here's the deal - Dive as deep as you want. Read my thoughts first. If you find them intriguing, read the main article. If you want to learn more, check out the related articles and books.
[Before we jump in, a request: If you like the stuff I send you every week, I'd be honored if you could forward this to a friend so they can subscribe. Thanks a lot!]
Back in 2018, Naval Ravikant put up a series of tweets that created quite a storm.
Although widely read and re-read, many of the tweets are too pithy to learn from. So he's elaborated on his website (and there's also a series of podcasts).
Spend a languid afternoon reading through. Do not speed read.
Three key messages resonated with me.
A. Making money isn't about luck alone.
Build your character in a way that luck becomes deterministic.
As Naval says, if there are 100 parallel universes, you should end up rich in 99. (systems, not goals)
If you do that, opportunity will find you.
B. Arm yourself with specific knowledge, accountability, judgment and leverage.
Specific knowledge: Learn to build, and learn to sell. If you're starting your career, learn to build. Later, learn to sell (knowing how to sell scales better over time).
Accountability: Helps you build leverage. By putting your head on the block to deliver, you gain reputational skin in the game.
Leverage: There are many types of leverage. Labor / team (been around forever), Capital (20th century), and Technology / Product (Internet Era). Business models have their own leverage too (think Uber's network effect).
Judgment: Knowing the long-term consequences of one's actions is the most important skill, in a world of infinite leverage.
C. "Impatience with actions, patience with results."
Reminds me of the Stoic Archer metaphor: Follow the process. An archer can only aim and shoot an arrow to the best of her abilities - she can't will it to the target.
Graham continues in a similar, but more startup-oriented vein, in How to Make Wealth.
As he says: To get rich, you need to get yourself in a situation with two things - Measurement and Leverage.
You need to be in a position where your performance can be measured, or there is no way to get paid more by doing more. And you have to have leverage, in the sense that the decisions you make have a big effect.
Measurement alone is not enough. An example of a job with measurement but not leverage is doing piecework in a sweatshop. Your performance is measured and you get paid accordingly, but you have no scope for decisions. The only decision you get to make is how fast you work, and that can probably only increase your earnings by a factor of two or three.
An example of a job with both measurement and leverage would be lead actor in a movie. Your performance can be measured in the gross of the movie. And you have leverage in the sense that your performance can make or break it.
A good hint to the presence of leverage is the possibility of failure. Upside must be balanced by downside, so if there is big potential for gain there must also be a terrifying possibility of loss.
But you don't have to become a CEO or a movie star to be in a situation with measurement and leverage. All you need to do is be part of a small group working on a hard problem (i.e., a startup).
Smallness = Measurement
Or rather, smallness = easy measurement. Just track one number - the number of happy users, and how that's growing.
Technology = Leverage
As a startup, when you develop technology, or a new technique to solve an existing problem, you create leverage. Code, written once, can be replicated for free. You solve everyone's problem at once.
Being small is itself a source of leverage too. You can have a 10-person team of all-stars. But a 1000-person organization will, of necessity, tend towards the population average.
This article made me homesick for my startup days.
Compounding created the Ice Age.
It wasn't a freakish cold winter that caused it. No, it was a temperate, cool summer that was the culprit.
A mild summer, that didn't get warm enough to melt the previous winter's snow. Which made it easier for more snow to accumulate during the next winter. More snow reflected more of the sun's rays, resulting in even more cooling.
You start with a thin veneer of snow left over from a cool summer. No one notices. And after a few thousand years, the Earth is covered in miles-high ice.
It’s an example of compounding in nature. And it shows what can be built off a minuscule base.
Which brings us to Warren Buffett.
There are thousands of books dedicated to Buffett's investing principles.
But, as Morgan Housel says in The Freakishly Strong Base, few notice the simplest fact. Buffett isn't just a good investor. He's been a good investor since he was a child.
What if Buffett got serious about investing at age 22, instead of at 10 years old?
What if he was at an admirable 90th percentile of net worth at age 30 ($24,000 in his time)?
He would be worth $1.9 billion today.
Let that sink in. Less than 3% (!!) of his current wealth.
We write book after book (I've read several) on how he sizes up management teams and follows the free cash flow. When the most practical lesson is:
"Start investing in third grade".
That's the other surprising thing about compounding. You're not too late. You're never too late.
"Can you imagine how awesome it would have been to be an entrepreneur in 1990, when almost any dot com name you wanted was available? When Amazon was still to start?"
Here's the thing though - as Kevin Kelly says in You are not late, you can bet that in 2050, someone will say the same thing about 2020.
"Imagine, AI hadn't even been invented then. And people still used to drive themselves around! Fortnite had just launched!"
(OK, 2020 post-quarantine might be the year driving around stops).
Bottomline: The future will always be more different from today than today is from the past. That's what compounding means. The future adds a zero.
Ergo, the best time to start something new is NOW.
..was this tweet:
Damn, to be a student right now :(
That's it for this week! Hope you liked the articles. Drop me a line (just hit reply or click on the "Leave a comment" button) and let me know what you think.