The best podcast of 2019 in my opinion.
The advice he gives on building wealth overlaps with a few principles I’ve been learning the hard way over the last few years, so I found his advice highly actionable.
In this article I summarize my takeaways from listening and add some of my own gloss atop his ideas so that they better fit in my own jigsaw of mental models.
I encourage you to listen to the bundle episode and work the ideas that resonate with you into your own models for wealth building and career development.
In Naval’s framework, Wealth is defined as assets that earn for you while you sleep (such as an automated factory or a savings account). The acquisition of wealth creates freedom & individual sovereignty, which are the reasons for working to generate it.
Money is distinct from wealth. Money is a social credit that serves as a medium of exchange between individuals.
Status is your ranking in a given social hierarchy. Status was highly correlated with survival during our hunter-gatherer days, so status seeking behaviors are conserved in our genes. Most public figures are playing a status game, which differs from the wealth game in that it is zero-sum and the wealth game is non-zero sum.
Playing the status game will likely reduce inner tranquility and will conflict with your wealth building goals. Try to play the status game only when you have to.
Naval points out that capitalism is really just the term we’ve given to what humans do naturally when the need to trade emerges. In nature, most complex systems (from gut biomes to rain forests) contain more parasites than non-parasitic organisms.
Parasites live off of the body or byproducts of other organisms, and in some cases provide reciprocal value to those hosts instead of freeloading.
A small subset of humans generate most of the value that society enjoys. Naval heaps credit on scientists and technologists, though I’d wedge cultural figures into that mix as well. Burdensome taxation, communism, monopolies, crony-capitalism, exploitable unpriced externalities, and corrupt social redistribution programs are all skimming value from wealth creators. While the primacy of this point feels suspiciously Randian, that could be an over-projection on my part.
If moral frameworks become based on zero-sum redistributionary practices, society will degrade.
Parsing the Luck Variable
Naval signs on to the Benjamin Disraeli view of categorizing luck into four baskets each with unique morphologies.
Random Luck — Random positive occurrences that can’t be controlled or influenced. Apply Stoic indifference whether randomness graces you positively or otherwise.
Effortful Luck — This happens when you drum up lots of activity and snag whatever jumps out. Think of this type of luck as the more streets you hoof the more changes you have to slip on loose change.
Skillful Luck — Skillful luck happens when you know so much about a specific topic that you can interpret data in a way that others can’t. In walks a Dan Brown protagonist to claim this prize.
Authenticity Luck — When you monopolize a very specific niche of value you can capitalize on random luck bestowed on weak ties by becoming an indispensable piece of their luck capturing team. For example, a specialty deep sea diver can capitalize on the random luck of another mariner who discovers a shipwreck and requires a steady diver to recover the bounty.
To improve your chances of feelin’ lucky use effort, skill, and authenticity to earn equity in the luck of others.
Aquire Wealth Mechanisms
Cash from a W2 or commissions is not going to make you wealthy, though may off-gas healthy cashflows. To start earning wealth you must use cash (or time) to purchase financial assets.
The primary asset that Naval suggests is equity in tech startups. Naval feels that pieces of business are the best mechanisms for capturing value and generating wealth. There are of course other financial assets available, and I’d say there are only ~100,000 people in America that can hack it as a successful investor in early stage startups.
Live Below Your Means
Keeping expenses low and preventing your expense line from ballooning as income grows. If you do this you will retain cash which you can use to earn wealth. Classic wisdom.
Living below your means seems obvious but can be tricky because the hedonic treadmill can creep up on you slowly. Naval points out that working in tech can be a forced savings plan because wealth is earned in large chunks with long stretches of minimal earning between payoffs. In this payoff structure it could be easier to keep a slim expense line. I think this is BS in practice. I’d say cultivate better expense suppression habits instead.
Expense line minimization can be fruitful at first, but you can’t scrimp your way to wealth without also buying assets with cash you otherwise would have spent.
One bit of good news is that being poor today is better than being rich in the past given technological advancements. Most high-dollar products (Rolexes, Lambos) contain a higher portion of signaling value than utility value than substitutes of the past. This means that if you reject the status game you can acquire all the utility value of modern consumer goods with minimal cash relative to the past.
Zooming out, the most important thing you can do on the expense side is to avoid total ruin (Kelly Criterion). Don’t gamble away all your net worth or do illegal things that will get your assets seized. Multiplying by zero is zero so never go to zero.
Don’t be a Cynic
The nose pickers on the sidelines with their little pea shooters will never build real wealth. Pair an action bias with informed optimism and ignore the peanut gallery.
Back in those pesky hunter-gatherer days, only the paranoid (and I suppose Andy Grove) survived. Optimists got torn to bits by tigers. That means your natural tendency is to be a paranoid pessimist, so you must suppress your biology to remain optimistic in survival situations.
The internet connects all people, so you can find an audience for nearly anything. You can scale niche obsessions (think Hardcore History, tool restoration YouTube videos, blogs about off-grid living, etc).
Therefore it is better to niche down into irrationally authentic things. This would have been crap advice even 40 years ago, which is why typical resumes were (and still are) designed to sterilize authenticity and variability.
Authenticity is the escape hatch from competition and drudgery.
Play Long Term Games
Respawning (moving to a new city or burning all your bridges) resets the game so there are high switching costs to changing games. Seek environments that churn slowly and don’t require heavy-handed contracts to ensure trust. By settling where people that are in it for long haul, you can help make others rich and they will make you rich in turn.
When choosing who to work with, you can’t compromise on competence, energy, or integrity. Missing one of those will lead to ruin. Since behavior is what people do despite what they say, pay attention to actions when selecting who you will transact with. There are parasites everywhere.
Also, you also can’t force good people to play the game you want them to play. Eventually the costs of enforcement will lead you to ruin (looking at you Stalin). You can certainly design incentives that align self-interest with global goals, but that is about all you can do.
Finally, know that self-esteem is just the reputation you have with yourself, and every day is a new round. You’ll always know how closely your behavior matches your moral code so don’t lie or cheat.
Build Specific Knowledge
Specific knowledge might be described as a set of ‘secrets’ that you and only you know how to deploy into the world. If life is a simulation, these are the cheat codes.
Specific knowledge is found from pursing authentic curiosity. It is hard to separate the practitioner from this type of know-how because it can only be witnessed when it is acted out. You can put a picture of art in a textbook but you can’t teach the artist’s motor movements that produced it.
To uncover clues about what specific knowledge you might possess, look at what you’re really up to (not what your title or degree says you do). Find what you’re a natural at by observing yourself closely, and asking others who know you well.
One pathway to more global knowledge, from which specific knowledge might emerge, is simply reading. A love for reading is a foundation of wealth creation. Read slowly until you understand what you are learning. If you are memorizing you are not assimilating, and you need to downgrade to more basic material to ensure you’ve got the fundamentals right.
Try different things to align what you are great at with what you are doing. It is very unlikely you got there on your first try (picking a major). Reading, writing, math, coding, & persuasion are good places to start anew.
Maximize Skin In The Game
Build accountability into your life. By putting your name on something, you are taking risk. When things go well you will build credibility. If things go poorly, as long as you maintain morality, you can be redeemed.
You can take a de facto equity position in your work by forcing accountability. In this way you are applying Skin In The Game to reputation management which will be a forcing function to build trust and integrity.
There are three kinds of leverage that can be used to build wealth.
Labor — This is having people work for you. Society overvalues labor because it is very old and highly visible. This leverage type is messy, regulated, and complex to maintain in steady state.
Capital — Using money to make more money. Society generally doesn’t like it when you make money this way. It is highly scalable, but it is hard to attain the startup capital.
Products Without Replication Costs. Products that don’t cost any money to duplicate are modern forms of leverage. Digital media and code are the best examples. Media and code are both forms of permissionless leverage, (as opposed to labor and capital which both require permission from others to use). You can further lever these types of products with Network Effects, where the value of a network is proportional to the square of the number of nodes. Think Facebook and LinkedIn when you think of network effects.
Wealth From Judgement
Judgement is the ability to predict the long term consequences of actions. This is cultivated through embodied specific knowledge applied over many iterations and reflected upon unemotionally. You need to be able to see what is actually happening before little issues become crisis that cause ruin.
Leverage is a force multiplier for judgement. In this age of infinite leverage, judgement is everything. Small step-ups in judgement can lead to asymmetric winner-take-all effects.
This is ancient wisdom embodied in the Matthew Principle “to those who have everything will be given, and to those who have not everything will be taken.” By applying good judgement to capital allocation, people, and/or other key decisions, you will be trusted with ever more resources.
Wealth from Working Hard
You must actualize the aforementioned building blocks of wealth creation through sustained hard work for them to work.
Set a high hourly rate and stick to it. Factor this cost of your time into decisions. Delegate lesser tasks to people who are happy to work for lower rates. Make wealth creation your main priority, do your best to not become wrapped around the axle with low value tasks beneath your hourly rate.
Remember that penny pinching has diminishing returns. If you set an hourly rate of $500 and you tele-bicker with a customer service rep for an hour to get an $8 up-charge refunded, you’ve actually lost $492. Fighting on absolute principle will get you stuck in endless tiny wars. Sometimes you need to just take a loss and move on to the next opportunity.
In terms of raw hours, Google was about as time consuming as any corner grocery store is to get off the ground. It takes a lot of work to even build small things, to it’s better to be more ambitious. Upfront time expenses will yield returns in line with that initial ambition. Wealth building is mental Olympics, so sprint and rest. Inspiration is perishable so when it hits, get to work.
Product-market-founder fit is how well you are suited to a certain opportunity, and it is much more important than working hard (though you must work hard).
Be impatient with actions and patient with results. Solve problems right when they happen. Keep a clean calendar by saying “no” to meetings and then focusing time on your highest leverage critical path tasks.
Rate of product progress the resume of a founder. Decks alone will only trick the investors you don’t want investing.
This whole bag takes time, even with all the pieces in place. On a long enough time scale you will get paid if you stick with it. Sometimes your peers will get to riches before you do, though their mechanisms will seem inscrutable.
All else being equal, these peers are merely fortunate to have front-loaded their arbitrary portion of random luck. Advice from them will likely not be useful because they will hand you numbers to a lottery ticket that’s already been called. You must avoid jealousy and continue to forge your own path.
Naval closes with the parting wisdom that some people think wealth will solve all their problems. It will not, merely their money problems. Wealth creation is not a proxy for self-development.
So to conclude — the building blocks that you need to get rich are specific knowledge, accountability, leverage, judgement, and lifelong learning. These all compound together through sustained hard work to contribute to wealth creation.