A collection of all my interviews about my ‘How to Get Rich’ tweetstorm.
Wealth is assets that earn while you sleep
Naval is a prolific tech investor and founder of AngelList
Nivi: You probably know Naval from his Twitter account.
We’re going to talk about histweetstorm, “How To Get Rich (without getting lucky).” We’ll go through most of the tweets in detail, give Naval a chance to expand on them and generally riff on the topic. He’ll probably throw in ideas he hasn’t published before.
Naval’s the co-founder of AngelList and Epinions. He’s also a prolific tech investor in companies like Twitter, Uber and many more.
Naval’s the co-founder of AngelList and Epinions. He’s also a prolific tech investor in companies like Twitter, Uber and many more.
I’m the co-founder of AngelList with Naval. And I co-authored the Venture Hacks blog with him back in the day.
Naval: The “How to Get Rich” tweetstorm definitely hit a nerve and went viral. A lot of people say it was helpful and reached across aisles.
People outside of the tech industry—people in all walks of life—want to know how to solve their money problems. Everyone vaguely knows they want to be wealthy, but they don’t have a good set of principles to do it by.
Wealth is assets that earn while you sleep
Nivi: What’s the difference between wealth, money and status?
Naval: Wealth is the thing you want. Wealth is assets that earn while you sleep; it’s the factory of robots cranking out things. Wealth is the computer program running at night that’s serving other customers. Wealth is money in the bank that is reinvested into other assets and businesses.
A house can be a form of wealth, because you can rent it out; although that’s a less productive use of land than running a commercial enterprise.
My definition of wealth is oriented toward businesses and assets that can earn while you sleep.
Wealth buys your freedom
You want wealth because it buys you freedom—so you don’t have to wear a tie like a collar around your neck; so you don’t have to wake up at 7:00 a.m. to rush to work and sit in commute traffic; so you don’t have to waste your life grinding productive hours away into a soulless job that doesn’t fulfill you.
The purpose of wealth is freedom; it’s nothing more than that. It’s not to buy fur coats, or to drive Ferraris, or to sail yachts, or to jet around the world in a Gulf Stream. That stuff gets really boring and stupid, really fast. It’s about being your own sovereign individual.
You’re not going to get that unless you really want it. The entire world wants it, and the entire world is working hard at it.
It is competitive to some extent. It’s a positive sum game—but there are competitive elements to it, because there’s a finite amount of resources right now in society. To get the resources to do what you want, you have to stand out.
Money is how we transfer wealth
Money is how we transfer wealth. Money is social credits; it’s the ability to have credits and debits of other people’s time.
If I do my job right and create value for society, society says, “Oh, thank you. We owe you something in the future for the work that you did. Here’s a little IOU. Let’s call that money.”
That money gets debased because people steal the IOUs; the government prints extra IOUs; and people renege on their IOUs. But money tries to be a reliable IOU from society that you are owed something for something you did in the past.
We transfer these IOUs around; money is how we transfer wealth.
Status is your rank in the social hierarchy
There are fundamentally two huge games in life that people play. One is the money game. Money is not going to solve all of your problems; but it’s going to solve all of your money problems. I think people know that. They realize that, so they want to make money.
At the same time, deep down many people believe they can’t make it; so they don’t want any wealth creation to happen. They virtue signal by attacking the whole enterprise, saying, “Well, making money is evil. You shouldn’t do it.”
But they’re actually playing the other game, which is the status game. They’re trying to be high status in the eyes of others by saying, “Well, I don’t need money. We don’t want money.”
Status is your ranking in the social hierarchy.
Wealth is not a zero-sum game. Everybody in the world can have a house. Because you have a house doesn’t take away from my ability to have a house. If anything, the more houses that are built, the easier it becomes to build houses, the more we know about building houses, and the more people can have houses.
Wealth is a very positive-sum game. We create things together. We’re starting this endeavor to create a piece of art that explains what we’re doing. At the end of it, something brand new will be created. It’s a positive-sum game.
Status is a very old game
Status, on the other hand, is a zero-sum game. It’s a very old game. We’ve been playing it since monkey tribes. It’s hierarchical. Who’s number one? Who’s number two? Who’s number three? And for number three to move to number two, number two has to move out of that slot. So, status is a zero-sum game.
Politics is an example of a status game. Even sports is an example of a status game. To be the winner, there must be a loser. Fundamentally, I don’t like status games. They play an important role in our society, so we can figure out who’s in charge. But you play them because they’re a necessary evil.
On an evolutionary basis—if you go back thousands of years—status is a much better predictor of survival than wealth. You couldn’t have wealth before the farming age because you couldn’t store things. Hunter-gatherers carried everything on their backs.
Hunter-gatherers lived in entirely status-based societies. Farmers started going to wealth-based societies. The modern industrial economies are much more heavily wealth-based societies.
People creating wealth will always be attacked by people playing status games
There’s always a subtle competition going on between status and wealth. For example, when journalists attack rich people or the tech industry, they’re really bidding for status. They’re saying, “No, the people are more important. And I, the journalist, represent the people, and therefore I am more important.”
The problem is, to win at a status game you have to put somebody else down. That’s why you should avoid status games in your life—because they make you into an angry combative person. You’re always fighting to put other people down and elevate yourself and the people you like.
Status games are always going to exist; there’s no way around it. Realize that most of the time when you’re trying to create wealth, you’re getting attacked by someone else and they’re trying to look like a goody-two shoes. They’re trying to up their own status at your expense.
They’re playing a different game. And it’s a worse game. It’s a zero-sum game, instead of a positive-sum game.
Wealth isn’t about taking something from somebody else
Ethical wealth creation makes abundance for the world
Naval: I think there is this notion that making money is evil, right? It’s rooted all the way back down to “money is the root of all evil.” People think that the bankers steal our money. It’s somewhat true in that, in a lot of the world, there’s a lot of theft going on all the time.
The history of the world, in some sense, is this predator/prey relationship between makers and takers. There are people who go out and create things, and build things, and work hard on things.
Then there are people who come along with a sword, or a gun, or taxes, or crony capitalism, or Communism, or what have you. There’s all these different methods to steal.
Even in nature, there are more parasites than there are non-parasitical organisms. You have a ton of parasites in you, who are living off of you. The better ones are symbiotic, they’re giving something back. But there are a lot that are just taking. That’s the nature of how any complex system is built.
What I am focused on is true wealth creation. It’s not about taking money. It’s not about taking something from somebody else. It’s from creating abundance.
Obviously, there isn’t a finite number of jobs, or finite amount of wealth. Otherwise we would still be sitting around in caves, figuring out how to divide up pieces of fire wood, and the occasional dead deer.
Most of the wealth in civilization, in fact all of it, has been created. It got created from somewhere. It got created from people. It got created from technology. It got created from productivity. It got created from hard work. This idea that it’s stolen is this horrible zero-sum game that people who are trying to gain status play.
Everyone can be rich
But the reality is everyone can be rich. We can see that by seeing, that in the First World, everyone is basically richer than almost anyone who was alive 200 years ago.
200 years ago nobody had antibiotics. Nobody had cars. Nobody had electricity. Nobody had the iPhone. All of these things are inventions that have made us wealthier as a species.
Today, I would rather be a poor person in a First World country, than be a rich person in Louis the XIV’s France. I’d rather be a poor person today than aristocrat back then. That’s because of wealth creation.
The engine of technology is science that is applied for the purpose of creating abundance. So, I think fundamentally everybody can be wealthy.
This thought experiment I want you to think through is imagine if everybody had the knowledge of a good software engineer and a good hardware engineer. If you could go out there, and you could build robots, and computers, and bridges, and program them. Let’s say every human knew how to do that.
What do you think society would look like in 20 years? My guess is what would happen is we would build robots, machines, software and hardware to do everything. We would all be living in massive abundance.
We would essentially be retired, in the sense that none of us would have to work for any of the basics. We’d even have robotic nurses. We’d have machine driven hospitals. We’d have self-driving cars. We’d have farms that are 100% automated. We’d have clean energy.
At that point, we could use technology breakthroughs to get everything that we wanted. If anyone is still working at that point, they’re working as a form of expressing their creativity. They’re working because it’s in them to contribute, and to build and design things.
I don’t think capitalism is evil. Capitalism is actually good. It’s just that it gets hijacked. It gets hijacked by improper pricing of externalities. It gets hijacked by improper yields, where you have corruption, or you have monopolies.
We use credits and debits to cooperate across genetic boundaries
Free markets are intrinsic to the human species
Naval: Overall capitalism [meaning free markets] is intrinsic to the human species. Capitalism is not something we invented. Capitalism is not even something we discovered. It is in us in every exchange that we have.
When you and I exchange information, I want some information back from you. I give you information. You give me information. If we weren’t having a good information exchange, you’d go talk to somebody else. So, the notion of exchange, and keeping track of credits and debits, this is built into us as flexible social animals.
We are the only animals in the animal kingdom that cooperate across genetic boundaries. Most animals don’t even cooperate. But when they do, they cooperate only in packs where they co-evolve together, and they share blood, so they have some shared interests.
Humans don’t have that. I can cooperate with you guys. One of you is a Serbian. The other one is a Persian by origin. And I’m Indian by origin. We have very little blood in common, basically none. But we still cooperate.
What lets us cooperate? It’s because we can keep track of debits and credits. Who put in how much work? Who contributed how much? That’s all free market capitalism is.
So, I strongly believe that it is innate to the human species, and we are going to create more and more wealth, and abundance for everybody.
Everybody can be wealthy. Everybody can be retired. Everybody can be successful. It is merely a question of education and desire. You have to want it. If you don’t want it, that’s fine. Then you opt out of the game.
But don’t try to put down the people who are playing the game. Because that’s the game that keeps you in a comfortable warm bed at night. That’s the game that keeps a roof over your head. That’s the game that keeps your supermarkets stocked. That’s the game that keeps the iPhone buzzing in your pocket.
So, it is a beautiful game that is worth playing ethically, rationally, morally, socially for the human race. It’s going to continue to make us all richer and richer, until we have massive wealth creation for anybody who wants it.
Too many takers and not enough makers will plunge a society into ruin
Nivi: It’s not just individuals secretly despising wealth, right? There are countries, groups, political parties that overtly despise wealth. Or at least seem to.
Naval: That’s right. What those countries, political parties, and groups are reduced to is playing the zero-sum game of status. In the process to destroy wealth creation, they drag everybody down to their level.
Which is why the U.S. is a very popular country for immigrants because of the American dream. Anyone can come here, be poor, and then work really hard and make money, and get wealthy. But even just make some basic money for their life.
Obviously, the definition of wealth is different for different people. A First World citizen’s definition of wealth might be, “Oh, I have to make millions of dollars, and I’m completely done.”
Whereas to a Third World poor immigrant just entering the country, and we were poor immigrants who came here when I as fairly young, to the United States, wealth may just be a much lower number. It may just be, “I don’t have to work a manual labor job for the rest of my life that I don’t want to work.”
But groups that despise it will essentially bring the entire group to that level. If you get too many takers, and not enough makers, society falls apart. You end up with a communist country.
Look at Venezuela, right? They were so busy taking, and dividing, and reallocating, that people are literally starving in the streets, and losing kilograms of body weight every year just from sheer starvation.
Another way to think about it is imagine an organism that has too many parasites. You need some small number of parasites to stay healthy.
You need a lot of symbiotes. All the mitochondria in all of our cells that help us respirate and burn oxygen. These are symbiotes that help us survive. We couldn’t survive without them.
But, to me, those are partners in the wealth creation that creates the human body. But if you just were filled with parasites, if you got infected with worms, or a virus, or bacteria that were purely parasitical, you would die. So, any organism can only withstand a small number of parasites. When the parasitic element gets too far out of control, you die.
Again I’m talking about ethical wealth creation. I’m not talking about monopolies. I’m not talking about crony capitalism. I’m not talking about mispriced externalities like the environment.
I’m talking about free minds, and free markets. Small-scale exchange between humans that’s voluntary, and doesn’t have an outsized impact on others.
I think that kind of wealth creation, if a society does not respect it, if the group does not respect it, then society will plunge into ruin, and darkness.
Become the kind of person who makes money
Making money isn’t about luck
Naval: Obviously, we want to be wealthy, and we want to get there in this lifetime without having to rely on luck.
A lot of people think making money is about luck. It’s not. It’s about becoming the kind of person that makes money.
I like to think that if I lost all my money and if you drop me on a random street in any English-speaking country, within 5, 10 years I’d be wealthy again. Because it’s a skill set that I’ve developed and I think anyone can develop.
In 1,000 parallel universes, you want to be wealthy in 999 of them. You don’t want to be wealthy in the 50 of them where you got lucky. We want to factor luck out of it.
There’s four kinds of luck that we’re talking about. This came from a book. Marc Andreessen, wrote a blog post about it.
1. Blind luck
The first kind of luck you might say is blind luck. Where I just got lucky because something completely out of my control happened. That’s fortune, that’s fate.
2. Luck from hustling
Then there’s luck that comes through persistence, hard work, hustle, motion. Which is when you’re running around creating lots of opportunities, you’re generating a lot of energy, you’re doing a lot of things, lots of things will get stirred up in the dust.
It’s almost like mixing a petri dish and seeing what combines. Or mixing a bunch of reagents and seeing what combines. You’re generating enough force and hustle and energy that luck will find you.
We, as a group, you could argue, got together because of that. Nenad had put up these great videos online, I saw them on Twitter. In that sense, he generated his own luck by creating videos until people like me keep finding him.
3. Luck from preparation
A third way is that you become very good at spotting luck. If you are very skilled in a field, you will notice when a lucky break happens in that field. When other people who aren’t attuned to it won’t notice. So you become sensitive to luck and that’s through skill and knowledge and work.
4. Luck from your unique character
Then the last kind of luck is the weirdest, hardest kind. But that’s what we want to talk about. Which is where you build a unique character, a unique brand, a unique mindset, where then luck finds you.
For example, let’s say that you’re the best person in the world at deep sea underwater diving. You’re known to take on deep sea underwater dives that nobody else will even attempt to dare.
Then, by sheer luck, somebody finds a sunken treasure ship off the coast. They can’t get it. Well, their luck just became your luck, because they’re going to come to you to get that treasure. You’re going to get paid for it.
Now, that’s an extreme example. The person who got lucky by finding the treasure chest, that was blind luck. But them coming to you and asking you to extract it and having to give you half, that’s not luck.
You created your own luck. You put yourself in a position to be able to capitalize on that luck. Or to attract that luck when nobody else has created that opportunity for themselves. When we talk about “without getting lucky,” we want to be deterministic, we don’t want to leave it to chance.
In 1,000 parallel universes, you want to be wealthy in 999 of them
Nivi: Do you want to elaborate a little bit more on the idea that in a 1,000 parallel universes you want to get rich in 999 of them? I think some people are going to see that and say, “that sounds impossible, it sounds like it’s too good to be true.”
Naval: No, I don’t think it’s impossible. I think that you may have to work a little bit harder at it given your starting circumstances. I started as a poor kid in India, so if I can make it, anybody can, in that sense.
Now, obviously, I had all my limbs and I had my mental faculties and I did have an education. There are some prerequisites you can’t get past. But if you’re listening to this video or podcast, you probably have the requisite means at your disposal, which is a functioning body and a functioning mind.
And I’ve encountered plenty of bad luck along the way. The first little fortune that I made, I instantly lost in the stock market. The second little fortune that I made, or I should have made, I basically got cheated by my business partners. It’s only the third time around has been a charm.
And, even then, it has been in a slow and steady struggle. I haven’t made money in my life in one giant payout. It’s always been a whole bunch of small things piling up. It’s more about consistently creating wealth by creating businesses, including opportunities and creating investments. It hasn’t been a giant one-off thing.
Wealth stacks up one chip at a time, not all at once
My personal wealth has not been generated by one big year. It stacks up little bit, chips at a time. More options, more businesses, more investments, more things that I can do.
Same way that someone like Nenad, illacertus, he’s building his brand online. He’s building videos. It’s not like any one video is going to suddenly shower him with riches overnight. It’s going to be a long lifetime of learning, of reading, of creating that’s going to compound.
We’re talking about getting wealthy so you can retire, so you have your freedom. Not retire in the sense that you don’t do anything. But in the sense that you don’t have to be any place you don’t want to be, you don’t have to do anything you don’t want to do, you can wake up when you want, you can sleep when you want, you don’t have a boss. That’s freedom.
We’re talking about enough wealth to get to freedom. Especially thanks to the Internet these days, though, opportunities are massively abundant. I, in fact, have too many ways to make money, I don’t have enough time. I have opportunities pouring out of my ears and the thing I keep running out of is time.
There’s just so many ways to create wealth, to create products, to create businesses, to create opportunities, and to, as a byproduct, get paid by society that I can’t even handle it all.
Build your character in a way that luck becomes deterministic
Nivi: I think it’s pretty interesting that the first three kinds of luck that you described there are very common cliches for them that everybody knows. And then for that last kind of luck that comes to you out of the unique way that you act, there’s no real cliche for it.
So, for the first three kinds, there’s “dumb luck,” or “blind luck.” That’s the first kind of luck. The second kind of luck there’s the cliché that “fortune favors the bold.” That’s a person who gets lucky just by stirring the pot and acting. The third kind of luck, people say that “chance favors the prepared mind.”
But for the fourth kind of luck, there isn’t a common cliché out there that matches the unique character of your action, which I think is interesting and perhaps an opportunity and it also shows that people aren’t necessarily taking advantage of that kind of luck the way they should be.
Naval: I think also at that point, it starts becoming so deterministic that it stops being luck. So, the definition starts fading from luck to more destiny. So, I would characterize that fourth one as you build your character in a certain way and then your character becomes your destiny.
Build your character so opportunity finds you
One of the things I think that is important to making money, when you want the kind of reputation that makes people do deals through you. I use the example of like, if you’re a great diver then treasure hunters will come and give you a piece of the treasure for your diving skills.
If you’re a trusted, reliable, high-integrity, long-term thinking deal maker, then when other people want to do deals but they don’t know how to do them in a trustworthy manner with strangers, they will literally approach you and give you a cut of the deal or offer you a unique deal just because of the integrity and reputation that you have built up.
Warren Buffett, he gets offered deals, and he gets to buy companies, and he gets to buy warrants, and bailout banks and do things that other people can’t do because of his reputation.
But of course that’s fragile. It has accountability on the line, it has a strong brand on the line, and as we will talk about later, that comes with accountability attached.
But I would say your character, your reputation, these are things that you can build that then will let you take up advantage of opportunities that other people may characterize as lucky but you know that it wasn’t luck.
Nivi: You said that this fourth kind of luck is more or less a destiny. There’s a quote from that original book that was in Marc’s blog posts from Benjamin Disraeli, who I think was the former prime minister of the UK. The quote to describe this kind of luck was, “we make our fortunes and we call them fate.”
You have to be a little eccentric to be out on the frontier by yourself
There were a couple other interesting things about this kind of luck that were mentioned in the blog post, I think it’ll be good for the listeners to hear about is that, this fourth kind of luck can almost come out of eccentric ways that you do your things and that eccentricity is not necessarily a bad thing in this case. In fact, it’s a good thing.
Naval: Yeah, absolutely. Because the world is a very efficient place, so, everyone has dug through all the obvious places to dig and so to find something that’s new and novel and uncovered, it helps to be operating on a frontier.
Where right there you have to be a little eccentric to be out on the frontier by yourself, and then you have to be willing to dig deeper than other people do, deeper than seems rational just because you’re interested.
Nivi: Yeah, the two quotes that I’ve seen that express this kind of luck in addition to that Benjamin Disraeli one, are this one from Sam Altman where he said, “extreme people get extreme results.” I think that’s pretty nice. And then there’s this other one from Jeffrey Pfeffer, who is a professor at Stanford that, “you can’t be normal and expect abnormal returns.” I’ve always enjoyed that one too.
Naval: Yeah. And one quote that I like which is the exact opposite of that is, “play stupid games win stupid prizes.” A lot of people spend a lot of their time playing social games like on Twitter where you’re trying to improve your social standing and you basically win stupid social prizes which are worthless.
Nivi: I guess the last thing that I have from this blog post is the idea that by pursuing these kinds of luck especially the last one, basically everything but dumb luck, by pursuing them you essentially run out of unluck. So, if you just keep stirring the pot and stirring the pot, that alone you will run out of unluck.
Naval: Yeah, or it could just be reversion to the mean. So, then you at least neutralized luck so that it’s your own talents that come into play.
You can’t earn non-linearly when you’re renting out your time
You won’t get rich renting out your time
Nivi: Next you go into more specific details on how you can actually get rich, and how you can’t get rich. The first point was about how you’re not going to get rich: “You are not going to get rich renting out your time. You must own equity, a piece of the business to gain your financial freedom.”
Naval: This is probably one of the absolute most important points. People seem to think that you can create wealth, and make money through work. And it’s probably not going to work. There are many reasons for that.
But the most basic is just that your inputs are very closely tied to your outputs. In almost any salaried job, even at one that’s paying a lot per hour like a lawyer, or a doctor, you’re still putting in the hours, and every hour you get paid.
So, what that means is when you’re sleeping, you’re not earning. When you’re retired, you’re not earning. When you’re on vacation, you’re not earning. And you can’t earn non-linearly.
If you look at even doctors who get rich, like really rich, it’s because they open a business. They open like a private practice. And that private practice builds a brand, and that brand attracts people. Or they build some kind of a medical device, or a procedure, or a process with an intellectual property.
So, essentially you’re working for somebody else, and that person is taking on the risk, and has the accountability, and the intellectual property, and the brand. So, they’re just not gonna pay you enough. They’re gonna pay you the bare minimum that they have to, to get you to do their job. And that can be a high bare minimum, but it’s still not gonna be true wealth where you’re retired.
Renting out your time means you’re essentially replaceable
And then finally you’re actually just not even creating that much original for society. Like I said, this tweetstorm should have been called “How to Create Wealth.” It’s just “How to Get Rich” was a more catchy title. But you’re not creating new things for society. You’re just doing things over and over.
And you’re essentially replaceable because you’re now doing a set role. Most set roles can be taught. If they can be taught like in a school, then eventually you’re gonna be competing with someone who’s got more recent knowledge, who’s been taught, and is coming in to replace you.
You’re much more likely to be doing a job that can be eventually replaced by a robot, or by an AI. And it doesn’t even have to be wholesale replaced over night. It can be replaced a little bit at a time. And that kind of eats into your wealth creation, and therefore your earning capability.
So, fundamentally your inputs are matched to your outputs. You are replaceable, and you’re not being creative. I just don’t think that, that is a way that you can truly make money.
You must own equity to gain your financial freedom
So everybody who really makes money at some point owns a piece of a product, or a business, or some kind of IP. That can be through stock options, so you can be working at a tech company. That’s a fine way to start.
But usually the real wealth is created by starting your own companies, or by even investors. They’re in an investment firm, and they’re buying equity. These are much more the routes to wealth. It doesn’t come through the hours.
You want a career where your inputs don’t match your outputs
You really just want a job, or a career, or a profession where your inputs don’t match your outputs. If you look at modern society, again this is later in the tweetstorm. Businesses that have high creativity and high leverage tends to be ones where you could do an hour of work, and it can have a huge effect. Or you can do 1,000 hours of work, and it can have no effect.
For example, look at software engineering. One great engineer can for example create bitcoin, and create billions of dollars worth of value. And an engineer who is working on the wrong thing, or not quite as good, or just not as creative, or thoughtful, or whatever, can work for an entire a year, and every piece of code they ship ends up not getting used. Customers don’t want it.
That is an example of a profession where the input and the outputs are highly disconnected. It’s not based on the number of hours that you put in.
Whereas on the extreme other end, if you’re a lumberjack, even the best lumberjack in the world, assuming you’re not working with tools, so the inputs and outputs are clearly connected. You’re just using an ax, or a saw. You know, the best lumberjack in the world may be like 3x better than one of the worst lumberjacks, right? It’s not gonna be a gigantic difference.
So, you want to look for professions and careers where the inputs and outputs are highly disconnected. This is another way of saying that you want to look for things that are leveraged. And by leveraged I don’t mean financial leveraged alone, like Wall Street uses, and that has a bad name. I’m just talking about tools. We’re using tools.
A computer is a tool that software engineers use. If I’m a lumberjack with bulldozers, and automatic robot axes, and saws, I’m gonna be using tools, and have more leverage than someone who is just using his bare hands, and trying to rip the trees out by the roots.
Tools and leverage are what create this disconnection between inputs and outputs. Creativity, so the higher the creativity component of a profession, the more likely it is to have disconnected inputs and outputs.
So, I think that if you’re looking at professions where your inputs and your outputs are highly connected, it’s gonna be very, very, hard to create wealth, and make wealth for yourself in that process.
People busy upgrading their lifestyles just can’t fathom this freedom
People living below their means have freedom
Nivi: Any other big things you should avoid, other than renting out your time?
Naval: Yeah, there are two tweets that I put out that are related. The first one I was talking about where someone, like, how your lifestyle has to upgrade, shouldn’t get upgraded too fast. And that one basically said, people who are living far below their means enjoy a freedom that people busy upgrading their lifestyles just can’t fathom.
And I think that’s very important, just to not upgrade your lifestyle all the time. To maintain your freedom. And it just gives you freedom of operation. You basically, once you make a little bit of money, you still want to be living like your old self, so that just the worry goes away. So, don’t run out to upgrade that house, and lifestyle, and all that stuff.
The most dangerous things are heroin and a monthly salary
Let’s say you’re getting paid $1,000 an hour. The problem is, is that when you go into a work lifestyle like that, you don’t just suddenly go from making $20 an hour to making $1,000 an hour. That’s a progression over a long career.
And as that happens, one subtle problem is that you upgrade your lifestyle as you make more, and more money. And that upgrading of the lifestyle kind of ups what you consider to be wealth, and you stay in this wage slave trap.
So, I forget who said it, maybe it was Nassim Taleb. But he said, “The most dangerous things are heroin, and a monthly salary.” Right, because they are highly addictive. The way you want to get wealthy is you want to be poor, and working, and working, and working.
Ideally, you’ll make your money in discrete lumps
And this is for example how the tech industry works. Where you don’t make any money for ten years, and then suddenly at year eleven, you might have a giant payday.
Which is by the way one reason why these very high marginal tax rates for the so-called wealthy are flawed because the highest risk-taking, most creative professions you literally lose money for a decade over your life, while you take massive risk, and you bleed, and bleed, and bleed.
And then suddenly in year eleven, or year fifteen, you might have one single big payday. But then of course Uncle Sam show up, and basically say, “Hey, you know what, you just made a lot money this year. Therefore, you’re rich. Therefore, you’re evil and you’ve got to hand it all over to us.” So, it just destroys those kinds of creative risk taking professions.
But ideally you want to make your money in discrete lumps, separated over long periods of time, so that your own lifestyle does not have a chance to adapt quickly, and then you basically say, “Okay, now I’m done. Now I’m retired. Now I’m free. I’m still gonna work because you got to do something with your life, but I’m gonna work on only the things that I want, when I want.” And so you have much more creative expression, and much less about money.
Society will pay you for creating what it wants and delivering it at scale
Give society what it wants, but doesn’t know how to get—at scale
Nivi: You’re not gonna get rich renting out your time. But you say that, “you will get rich by giving society what it wants, but does not yet know how to get at scale.”
Naval: That’s right. So, essentially as we talked about before, money is IOUs from society saying, “You did something good in the past. Now here’s something that we owe you for the future.” And so society will pay you for creating things that it wants.
But society doesn’t yet know how to create those things because if it did, they wouldn’t need you. They would already be stamped out big time.
Almost everything that’s in your house, in your workplace, and on the street used to be technology at one point in time. There was a time when oil was a technology, that made J.D. Rockefeller rich. There was a time when cars were technology, that made Henry Ford rich.
So, technology is just the set of things, as Alan Kay said, that don’t quite work yet [correction: Danny Hillis]. Once something works, it’s no longer technology. So, society always wants new things.
Figure out what product you can provide and then figure out how to scale it
And if you want to be wealthy, you want to figure out which one of those things you can provide for society, that it does not yet know how to get, but it will want, that’s natural to you, and within your skillset, within your capabilities.
And then you have to figure out how to scale it. Because if you just build one of it, that’s not enough. You’ve got to build thousands, or hundreds of thousands, or millions, or billions of them. So, everybody can have one.
Steve Jobs, and his team of course figured out that society would want smartphones. A computer in their pocket that had all the phone capability times 100, and be easy to use. So, they figured out how to build that, and then they figured out how to scale it.
And they figured out how to get one into every First World citizen’s pocket, and eventually every Third World citizen too. And so because of that they’re handsomely rewarded, and Apple is the most valuable company in the world.
Nivi: The way I tried to put it was that the entrepreneur’s job is to try to bring the high end to the mass market.
Naval: It starts as high end. First it starts as an act of creativity. First you create it just because you want it. You want it, and you know how to build it, and you need it. And so you build it for yourself. Then you figure out how to get it to other people. And then for a little while rich people have it.
Like, for example rich people had chauffeurs, and then they had black town cars. And then Uber came along, and everyone’s private driver is available to everybody. And now you can even see Uber pools that are replacing shuttle buses because it’s more convenient. And then you get scooters, which are even further down market of that. So, you’re right. It’s about distributing what rich people used to have to everybody.
But the entrepreneur’s job starts even before that, which is creation. Entrepreneurship is essentially an act of creating something new from scratch. Predicting that society will want it, and then figuring out how to scale it, and get it to everybody in a profitable way, in a self-sustaining way.
The Internet allows you to scale any niche obsession
The Internet has massively broadened the possible space of careers
Nivi: Let’s look at this next tweet, which I thought was cryptic, and also super interesting, about the kind of job or career that you might have. You said, “The internet has massively broadened the possible space of careers. Most people haven’t figured this out yet.”
Naval: The fundamental property of the internet more than any other single thing is it connects every human to each other human on the planet. You can now reach everyone.
Whether it’s by emailing them personally, whether it’s by broadcasting to them on Twitter, whether it’s by posting something on Facebook that they find, whether it’s by putting up a website they come and access.
It connects everyone to everyone. So, the internet is an inter-networking tool. It connects everybody. That is its superpower. So, you want to use that.
What that helps you figure out is the internet means you can find your audience for your product, or your talent, and skill no matter how far away they are.
For example, Nenad, who is Illacertus, if you look at his videos pre-internet, how would he get the message out there? It would just be … what would he do? He would run around where he lives in his neighborhood showing it to people on a computer, or a screen? Or he would try to get it played at his local movie theater? It was impossible. It only works because he can put it on the internet.
And then how many people in the world are really interested in it? Or even in interested in what we’re talking about are really gonna absorb it, right? It’s gonna be a very small subset of humanity. The key is being able to reach them.
The Internet allows you to scale any niche obsession
So, what the internet does is allows any niche obsession, which could be just the weirdest thing. It could be like people who collect snakes, to like people who like to ride hot air balloons, to people who like to sail around the world by themselves, just one person on a craft, or someone who’s obsessed with miniature cooking. Like, there’s this whole Japanese miniature cooking phenomenon. Or there’s a show about a woman who goes in people’s houses, and tidies it up, right?
So, whatever niche obsession you have, the internet allows you to scale. Now that’s not to say that what you build will be the next Facebook, or reach billions of users, but if you just want to reach 50,000 passionate people like you, there’s an audience out there for you.
So the beauty of this is that we have 7 billion human beings on the planet. The combinatorics of human DNA are incredible. Everyone is completely different. You’ll never meet any two people who are even vaguely similar to each other, that can substitute for each other.
It’s not like you can say, “Well, Nivi, just left my life. So, I can have this other person come in, and he’s just like Nivi. And I get the same feelings, and the same responses, and the same ideas.” No. There are no substitutes for people. People are completely unique.
So, given that each person has different skillsets, different interests, different obsessions. And it’s that diversity that becomes a creative superpower. So, each person can be creatively superb at their own unique thing.
But before that didn’t matter. Because if you were living in a little fishing village in Italy, like your fishing village didn’t necessarily need your completely unique skill, and you had to conform to just the few jobs that were available. But now today you can be completely unique.
You can go out on the internet, and you can find your audience. And you can build a business, and create a product, and build wealth, and make people happy just uniquely expressing yourself through the internet.
The space of careers has been so broadened. E-sports players, you know, people making millions of dollars playing Fortnite. People creating videos, and uploading them. YouTube broadcasters. Bloggers, podcasters. Joe Rogan, I read, true or false, I don’t know, but I read that he’s gonna make about $100 million a year on his podcast. And he’s had 2 billion downloads.
Even PewDiePie… there’s a hilarious tweet that I retweeted the other day. PewDiePie is the number one trusted name in news. This is a kid I think in Sweden, and he’s got three times the distribution of the top cable news networks. Just on his news channel. It’s not even on his entertainment channel.
Escape competition through authenticity
The internet enables any niche interest, as long as you’re the best at it to scale out. And the great news is because every human is different, everyone is the best at something. Being themselves.
Another tweet I had that is worth kind of weaving in, but didn’t go into this tweetstorm, was a very simple one. I like things when I can compress them down because they’re easy to remember, and easy to hook onto. But that one was, “Escape competition through authenticity.”
Basically, when you’re competing with people it’s because you’re copying them. It’s because you’re trying to do the same thing. But every human is different. Don’t copy.
I know we’re mimetic creatures, and René Girard has a whole mimesis theory. But it’s much easier than that. Don’t imitate. Don’t copy. Just do your own thing. No one can compete with you on being you. It’s that simple.
And so the more authentic you are to who you are, and what you love to do, the less competition you’re gonna have. So, you can escape competition through authenticity when you realize that no one can compete with you on being you. And normally that would have been useless advice pre-internet. Post-internet you can turn that into a career.
All returns in life come from compound interest in long-term games
Play long-term games with long-term people
Nivi: Talk a little bit about what industries you should think about working in. What kind of job you should have? And who you might want to work with? So, you said, “One should pick an industry where you can play long-term games with long-term people.” Why?
Naval: Yeah, this is an insight into what makes Silicon Valley work, and what makes high trust societies work. Essentially, all the benefits in life come from compound interests. Whether it’s in relationships, or making money, or in learning.
So, compound interest is a marvelous force, where if you start out with 1x what you have, and then if you increase 20% a year for 30 years, it’s not that you got 30 years times 20% added on. It was compounding, so it just grew, and grew, and grew until you suddenly got a massive amount of whatever it is. Whether it’s goodwill, or love, or relationships, or money. So, I think compound interest is a very important force.
You have to be able to play a long-term game. And long-term games are good not just for compound interest, they’re also good for trust. If you look at prisoner’s dilemma type games, a solution to prisoner’s dilemma is tit-for-tat, which is I’m just going do to you what you did last time to me, with some forgiveness in case there was a mistake made. But that only works in an iterated prisoner’s dilemma, in another words if we play a game multiple times.
So, if you’re in a situation, like for example you’re in Silicon Valley, where people are doing business with each other, and they know each other, they trust each other. Then they do right by each other because they know this person will be around for the next game.
Now of course that doesn’t always work because you can make so much money in one move in Silicon Valley, sometimes people betray each other because they’re just like, “I’m going to get rich enough off this that I don’t care.” So, there can be exceptions to all these circumstances.
But essentially if you want to be successful, you have to work with other people. And you have to figure out who can you trust, and who can you trust over a long, long period of time, that you can just keep playing the game with them, so that compound interest, and high trust will make it easier to play the game, and will let you collect the major rewards, which are usually at the end of the cycle.
So, for example, Warren Buffett has done really well as an investor in the U.S. stock market, but the biggest reason he could do that was because the U.S. stock market has been stable, and around, and didn’t get for example seized by the government during a bad administration. Or the U.S. didn’t plunge into some war. The underlying platform didn’t get destroyed. So, in his case, he was playing a longterm game. And the trust came from the U.S. stock market’s stability.
When you switch industries, you’re starting over from scratch
In Silicon Valley, the trust comes from the network of people in the small geographic area, that you figure out over time who you can work with, and who you can’t.
If you keep switching locations, you keep switching groups… let’s say you started out in the woodworking industry, and you built up a network there. And you’re working hard, you’re trying to build a product in the woodworking industry. And then suddenly another industry comes along that’s adjacent but different, but you don’t really know anybody in it, and you want to dive in, and make money there.
If you keep hopping from industry to … “No, actually I need to open a line of electric car stations for electric car refueling.” That might make sense. That might be the best opportunity. But every time you reset, every time you wander out of where you built your network, you’re going to be starting from scratch. You’re not going to know who to trust. They’re not going to know to trust you.
There are also industries in which people are transient by definition. They’re always coming in and going out. Politics is an example of that, right? In politics new people are being elected. You see in politics that when you have a lot of old-timers, like the Senate, people who have been around for a long time, and they’ve been career politicians.
There’s a lot of downside to career politicians like corruption. But an upside is they actually get deals done with each other because they know the other person is going to be in the same position ten years from now, and they’re going to have to keep dealing with them, so they might as well learn how to cooperate.
Whereas every time you get a new incoming freshman class in the House of Representatives, which turns over every two years with a big wave election. Nothing gets done because of a lot fighting. “Because I just got here, I don’t know you, I don’t know if you’re going to be around, why should I work with you rather than just try to do whatever I think is right?”
So, it’s important to pick an industry where you can play long-term games, and with long-term people. So, those people have to signal that they’re going to be around for a long time. That they’re ethical. And their ethics are visible through their actions.
Long-term players make each other rich
Nivi: In a long-term game, it seems that everybody is making each other rich. And in a short-term game, it seems like everybody is making themselves rich.
Naval: I think that is a brilliant formulation. In a longterm game, it’s positive sum. We’re all baking the pie together. We’re trying to make it as big as possible. And in a short term game, we’re cutting up the pie.
Now this is not to excuse the socialists, right? The socialists are the people who are not involved in baking the pie, who show up at the end, and say, “I want a slice, or I want the whole pie.” They show up with the guns.
But I think a good leader doesn’t take credit. A good leader basically tries to inspire people, so the team gets the job done. And then things get divided up according to fairness, and who contributed how much, or as close to it as possible, and took a risk, as opposed to just whoever has the longest knife… the sharpest knife at the end.
Returns come from compound interest in iterated games
Nivi: So, these next two tweets are, “Play iterated games. All returns in life, whether in wealth, relationships, or knowledge come from compound interest.”
Naval: When you have been doing business with somebody, you’ve been friends with somebody for ten years, twenty years, thirty years, it just gets better and better because you trust them so easily. The friction goes down, you can do bigger, and bigger things together.
For example, the simplest one is getting married to someone, and having kids, and raising children. That’s compound interest, right? Investing in those relationships. Those relationships end up being invaluable compared to more casual relationships.
It’s true in health and fitness. You know, the fitter you are, the easier it is to stay fit. Whereas the more you deteriorate your body, the harder it is to come back, and claw your way back to a baseline. It requires heroic acts.
Nivi: Regarding compound interest, I think I saw retweet something a while back. Maybe it was from Ed Latimore. It went something along the lines of, “Get some traction. Get purchase, and don’t lose it” [correction: the tweet is by @mmay3r]. So, the idea was to gain some initial traction, and never fall back, just keep ratcheting up, and up.
Naval: I don’t remember it exactly. But I think that was right. Yes, it was like, “Get traction, and don’t let go.” It was a good one, yes.
You can’t compromise on any of these three
Pick business partners with high intelligence, energy and integrity
Naval: In terms of picking people to work with, pick ones that have high intelligence, high energy, and high integrity, I find that’s the three-part checklist that you cannot compromise on.
You need someone who is smart, or they’ll head in the wrong direction. And you’re not going to end up in the right place. You need someone high-energy because the world is full of smart, lazy people.
We all know people in our life who are really smart, but can’t get out of bed, or lift a finger. And we also know people who are very high energy, but not that smart. So, they work hard, but they’re sort of running in the wrong direction.
And smart is not a pejorative. It’s not meant to say someone is smart, someone else is stupid. But it’s more that everyone is smart at different things. So, depending on what you want to do well, you have to find someone who is smart at that thing.
And then energy, a lot of times people are unmotivated for a specific thing, but they’re motivated for other things. So, for example, someone might be really unmotivated to go to a job, and sit in an office. But they might be really motivated to go paint, right?
Well, in that case they should be a painter. They should be putting art up on the internet. Trying to figure out how to build a career out of that, rather than wearing a collar around their neck, and going to a dreary job.
And then high integrity is the most important because otherwise if you’ve got the other two, what you have is you have a smart and hard working crook, who’s eventually going to cheat you. So, you have to figure out if the person is high-integrity.
And as we talked about, the way you do that is through signals. And signals is what they do, not what they say. It’s all the non-verbal stuff that they do when they think nobody is looking.
Motivation has to come intrinsically
Nivi: With respect to the energy, there was this interesting thing from Sam Altman a while back, where he was talking about delegation, and he was saying, “One of the important things for delegation is, delegate to people who are actually good at the thing that you want them to do.”
It’s the most obvious thing, but it seems like…you want to partner with people who are naturally going to do the things that you want them to do.
Naval: Yeah. I almost won’t start a company, or hire a person, or work with somebody if I just don’t think they’re into what I want them to do.
When I was younger, I used to try and talk people into things. I had this idea that you could sell someone into doing something. But you can’t. You can’t keep them motivated. You can get them inspired initially. It might work if you’re a king like Henry V, and you’re trying to get them to just charge into battle, and then they’ll figure it out.
But if you’re trying to keep someone motivated for the long-term, that motivation has to come intrinsically. You can’t just create it, nor can you be the crutch for them if they don’t have that intrinsic motivation. So, you have to make sure people actually are high-energy, and want to do what you want them to do, and what you want to work with them on.
Integrity is what someone does, despite what they say they do
Reading signals is very, very important. Signals are what people do despite what they say. So, it’s important to pay attention to subtle signals. We all know that socially if someone treats a waiter, or waitress in a restaurant really badly, then it’s only a matter of time until they treat you badly.
If somebody screws over an enemy, and is vindictive towards them, well it’s only a matter of time before they redefine you from friend to enemy, and you feel their wrath. So, angry, outraged, vindictive, short-term thinking people are essentially that way in many interactions in real life.
People are oddly consistent. That’s one of the things you learn about them. So, you want to find long-term people. You want to find people who seem irrationally ethical.
For example, I had a friend of mine whose company I invested in, and the company failed, and he could have wiped out all of the investors. But he kept putting more and more personal money in. Through three different pivots he put personal money in until the company finally succeeded. And in the process, he never wiped out the investors.
And I was always grateful to him for that. I said, “Wow, that’s amazing that you were so good to your investors. You didn’t wipe them out.” And he got offended by that. He said, “I didn’t do it for you. I didn’t do it for my investors. I did it for me. It’s my own self-esteem. It’s what I care about. That’s how I live my life.” That’s the kind of person you want to work with.
Another quote that I like, I have a tweet on this. I think I read this somewhere else, so I’m not taking credit for this. But I kind of modified it a little bit. Which is that “self-esteem is the reputation that you have with yourself.” You’ll always know.
So, good people, moral people, ethical people, easy to work with people, reliable people, tend to have very high self-esteem because they have very good reputations with themselves, and they understand that.
It’s not ego. Self-esteem and ego are different things. Because ego can be undeserved, but self-esteem at least you feel like you lived up to your own internal moral code of ethics.
And so it’s very hard to work with people who end up being low integrity. And it’s hard to figure out who is high integrity and low integrity. Generally, the more someone is saying that they’re moral, ethical, and high integrity, the less likely they are to be that way.
It’s very much like status signalling. If you overtly bid for status, if you overtly talk about being high status, that is a low status move. If you openly talk about how honest, reliable, and trustworthy you are, you’re probably not that honest and trustworthy. That is a characteristic of con men.
So, yeah, pick an industry in which you can play long-term games with long-term people.
Don’t partner with cynics and pessimists; their beliefs are self-fulfilling
Don’t partner with pessimists
Nivi: Let’s do this last tweet. You said, “Don’t partner with cynics, and pessimists. Their beliefs are self-fulfilling.”
Naval: Yes. Essentially, to create things, you have to be a rational optimist. Rational in the sense that you have to see the world for what it really is. And yet you have to be optimistic about your own capabilities, and your capability to get things done.
We all know people who are consistently pessimistic, who will shoot down everything. Everyone in their life has the helpful critical guy, right? He thinks he’s being helpful, but he’s actually being critical, and he’s a downer on everything.
That person will not only never do anything great in their lives, they’ll prevent other people around them from doing something great. They think their job is to shoot holes in things. And it’s okay to shoot holes in things as long as you come up with a solution.
There’s also the classic military line, “Either lead, follow, or get out of the way.” And these people want a fourth option, where they don’t want to lead, they don’t want to follow, but they don’t want to get out of the way. They want to tell you why the thing is not going to work.
And all the really successful people I know have a very strong action bias. They just do things. The easiest way to figure out if something is viable or not is by doing it. At least do the first step, and the second step, and the third, and then decide.
So, if you want to be successful in life, creating wealth, or having good relationships, or being fit, or even being happy, you need to have an action bias towards getting what you want.
Partner with rational optimists
And you have to be optimistic about it. Not irrationally. You know, there’s nothing worse than someone who is foolhardy and chasing something that’s not worth it.
That’s why I say rational optimist. But you have to be rational. Know all the pitfalls. Know the downsides, but still keep your chin up.
You’ve got one life on this planet. Why not try to build something big? This is the beauty of Elon Musk, and why I think he inspires so many people, it’s just because he takes on really, really big audacious tasks. And he provides an example for people to think big.
And it takes a lot of work to build even small things. I don’t think the corner grocery store owner is working any less hard than Elon Musk, or pouring any less sweat and toil into it. Maybe even more.
But for whatever reason, education, circumstance, they didn’t get the chance to think as big, so the outcome is not as big. So, it’s just better to think big. Obviously, rationally, within your means, stay optimistic.
The cynics and the pessimists, what they’re really saying, it’s unfortunate, but they’re basically saying, “I’ve given up. I don’t think I can do anything. And so the world to me just looks like a world where nobody can do anything. And so why should you go do something because if you fail, then I’m right, which is great. But if you succeed, then you just make me look bad.”
We descended from pessimists
Nivi: Yes, it’s probably better to be an irrational optimist, then it is to be a rational cynic.
Naval: There’s a completely rational frame on why you should be an optimist. Historically, if you go back 2,000 years, 5,000 years, 10,000 years, two people are wandering through a jungle, they hear a tiger. One’s an optimist, and says, “Oh, it’s not headed our way.” The other one says, “I’m a pessimist, I’m out of here.” And the pessimist runs and survives, and the optimist gets eaten.
So, we’re descended from pessimists. We’re genetically hardwired to be pessimists. But modern society is far, far safer. There are no tigers wandering around the street. It’s very unlikely that you will end up in total ruin, although you should avoid total ruin.
Much more likely that the upside is unlimited, and the downside is limited. So, adapting for modern society means overriding your pessimism, and taking slightly irrationally optimistic bets because the upside is unlimited if you start the next SpaceX, or Tesla, or Uber, you can make billions of dollars of value for society, and for yourself, and change the world.
And if you fail, what’s the big deal? You lost a few million dollars of investor money, and they’ve got plenty more, and that’s the bet they take on the chances that you will succeed.
It made sense to be pessimistic in the past. It makes sense to be optimistic today, especially if you’re educated and living in a First World country. Even a Third World country. I actually think the economic opportunities in Third World countries are much larger.
The one thing you have to avoid is the risk of ruin. Ruin means stay out of jail. So, don’t do anything that’s illegal. It’s never worth it to wear an orange jumpsuit. And stay out of total catastrophic loss. That could mean that you stay out of things that could be physically dangerous, hurt your body.
You have to watch your health. And stay out of things that can cause you to lose all of your capital, all of your savings. So, don’t gamble everything on one go. But take rationally optimistic bets with big upside.
BOCTAOE
Nivi: I think there’s people that will try and build up your ideas, and build on your ideas, no matter how far fetched they might seem. And then there are people who list all of the obvious exceptions, no matter how obvious they are.
And fortunately in the startup world, I don’t even really get exposed to the people that are giving you the obvious exceptions, and all the reasons it’s not going to work. I barely get exposed to that anymore.
Naval: That’s what Twitter is for. Scott Adams got so annoyed by this that he came up with a phrase, an acronym, which is “but of course there are obvious exceptions”, BOCTAOE. And he used to pin that acronym at the end of his articles for a while.
But Twitter is overrun with nitpickers. Whereas exactly as you were pointing out, Silicon Valley has learned that the upside is so great that you never look down on the kid who’s wearing a hoodie and has coffee on his shoes. And just looks like a slob because you don’t know if he’s going to be the next Mark Zuckerberg, or the next Reid Hoffman.
So, you’ve got to treat everybody with respect. You’ve got to look up to every possibility, and opportunity because the upside is so unlimited, and the downside is so limited in the modern world, especially with financial assets and instruments.
Specific knowledge can be found by pursuing your genuine curiosity
Arm yourself with specific knowledge
Nivi: Do you want to talk a little bit about the skills that you need, in particular specific knowledge, accountability, leverage and judgment. So, the first tweet in this area is “Arm yourself with specific knowledge accountability and leverage.” And I’ll throw in judgment as well. I don’t think you covered that in that particular tweet.
Naval: If you want to make money you have to get paid at scale. And why you, that’s accountability, at scale, that’s leverage, and just you getting paid as opposed to somebody else getting paid , that’s specific knowledge.
So, specific knowledge is probably the hardest thing to get across in this whole tweetstorm, and it’s probably the thing that people get the most confused about.
The thing is that we have this idea that everything can be taught, everything can be taught in school. And it’s not true that everything can be taught. In fact, the most interesting things cannot be taught. But everything can be learned. And very often that learning either comes from some innate characteristics in your DNA, or it could be through your childhood where you learn soft skills which are very, very hard to teach later on in life, or it’s something that is brand new so nobody else knows how to do it either, or it’s true on the job training because you’re pattern matching into highly complex environments, basically building judgment in a specific domain.
Classic example is investing, but it could be in anything. It could be in judgment in running a fleet of trucks, it could be judgment in weather forecasting.
So, specific knowledge is the knowledge that you care about. Especially if you’re later in life, let’s say your post 20, 21, 22, you almost don’t get to choose which specific knowledge you have. Rather, you get to look at what you have already built by that point in time, and then you can build on top of it.
Specific knowledge can’t be trained
The first thing to notice about specific knowledge is that you can’t be trained for it. If you can be trained for it, if you can go to a class and learn specific knowledge, then somebody else can be trained for it too, and then we can mass-produce and mass-train people. Heck, we can even program computers to do it and eventually we can program robots to walk around doing it.
So, if that’s the case, then you’re extremely replaceable and all we have to pay you is the minimum wage that we have to pay you to get you to do it when there are lots of other takers who can be trained to do it. So really, your returns just devolve into your cost of training plus the return on investment on that training.
So, you really want to pick up specific knowledge, you need your schooling, you need your training to be able to capitalize on the best specific knowledge, but the part of it that you’re going to get paid for is the specific knowledge.
Specific knowledge is found by pursuing your curiosity
For example, someone who goes and gets a degree in psychology and then becomes a salesperson. Well if they were already a formidable salesperson, a high grade salesmanship to begin with, then the psychology degree is leverage, it arms them and they do much better at sales.
But if they were always an introvert never very good at sales and they’re trying to use psychology to learn sales, they’re just not going to get that great at it.
So, specific knowledge is found much more by pursuing your innate talents, your genuine curiosity, and your passion. It’s not by going to school for whatever is the hottest job, it’s not for going into whatever field investors say is the hottest.
Very often specific knowledge is at the edge of knowledge. It’s also stuff that’s just being figured out or is really hard to figure out.
So, if you’re not 100% into it somebody else who is 100% into it will outperform you. And they won’t just outperform you by a little bit, they’ll outperform you by a lot because now we’re operating the domain of ideas, compound interest really applies and leverage really applies.
So, if you’re operating with 1,000 times leverage and somebody is right 80% of the time, and somebody else is right 90% of time, the person who’s right 90% of the time will literally get paid hundreds of times more by the market because of the leverage and because of the compounding factors and being correct. So, you really want to make sure you’re good at it so that genuine curiosity is very important.
Building specific knowledge will feel like play to you
So, very often, it’s not something you sit down and then you reason about, it’s more found by observation. You almost have to look back on your own life and see what you’re actually good at.
For example, I wanted to be a scientist and that is where a lot of my moral hierarchy comes from. I view scientists sort of at the top of the production chain for humanity. And the group of scientists who have made real breakthroughs and contributions that probably added more to human society, I think, than any single other class of human beings.
Not to take away anything from art or politics or engineering or business, but without the science we’d still be scrambling in the dirt fighting with sticks and trying to start fires.
My whole value system was built around scientists and I wanted to be a great scientist. But when I actually look back at what I was uniquely good at and what I ended up spending my time doing, it was more around making money, tinkering with technology, and selling people on things. Explaining things, talking to people.
So, I have some sales skills, which is a form specific knowledge that I have. I have some analytical skills around how to make money. And I have this ability to absorb data, obsess about it, and break it down and that is a specific skill that I have. I also just love tinkering with technology. And all of this stuff feels like play to me, but it looks like work to others.
So, there are other people to whom these things would be hard and they say like, “Well, how do I get good at being pithy and selling ideas?” Well, if you’re not already good at it or if you’re not really into it, maybe it’s not your thing, focus on the thing that you are really into.
This is ironic, but the first person to actually point out my real specific knowledge was my mother. She did it as an aside, talking from the kitchen and she said it when I was like 15 or 16 years old. I was telling a friend of mine that I want to be an astrophysicist and she said, “No, you’re going to go into business.”
I was like, “What, my mom’s telling me I’m going to be in business. I’m going to be an astrophysicist. Mom doesn’t know she’s talking about.” But mom knew exactly what she was talking about.
She’d already observed that every time we walk down the street, I would critique the local pizza parlor on why they were selling their slices a certain way with certain toppings and why their process of ordering was this way when it should have been that way.
So, she knew that I had more of a business curious mind, but then my obsession with science combined to create technology and technology businesses where I found myself.
So, very often, your specific knowledge is observed and often observed by other people who know you well and revealed in situations rather than something that you come up with.
Specific knowledge is on the bleeding edge of technology, art and communication
Specific knowledge can be taught through apprenticeships
Naval: To the extent that specific knowledge is taught, it’s on the job. It’s through apprenticeships. And that’s why the best businesses, the best careers are the apprenticeship or self-taught careers, because those are things society still has not figured out how to train and automate yet.
The classic line here is that Warren Buffett went to Benjamin Graham when he got out of school. Benjamin Graham was the author of the Intelligent Investor and sort of modernized or created value investing as a discipline. And Warren Buffett went to Benjamin Graham and offered to work for him for free.
And Graham said, “Actually, you’re overpriced, free is overpriced.” And Graham was absolutely right. When it comes to a very valuable apprenticeship like the type that Graham was going to give Buffet, Buffet should have been paying him a lot of money. That right there tells you that those are skills worth having.
Specific knowledge is often highly creative or technical
Specific knowledge also tends to be technical and creative. It’s on the bleeding edge of technology, on the bleeding edge of art, on the bleeding edge of communication.
Even today, for example, there are probably meme lords out there on the Internet who can create incredible memes that will spread the idea to millions of people. Or are very persuasive – Scott Adams is a good example of this. He is essentially becoming one of the most credible people in the world by making accurate predictions through persuasive arguments and videos.
And that is specific knowledge that he has built up over the years because he got obsessed with hypnosis when he was young, he learned how to communicate through cartooning, he embraced Periscope early, so he’s been practicing lots of conversation, he’s read all the books on the topic, he’s employed it in his everyday life. If you look at his girlfriend, she’s this beautiful young Instagram model.
That is an example of someone who has built up a specific knowledge over the course of his career. It’s highly creative, it has elements of being technical in it, and it’s something that is never going to be automated.
No one’s going to take that away from him, because he’s also accountable under one brand as Scott Adams, and he’s operating with the leverage of media with Periscope and drawing Dilbert cartoons and writing books. He has massive leverage on top of that brand and he can build wealth out of it if he wanted to build additional wealth beyond what he already has.
Specific knowledge is specific to the individual and situation
Nivi: Should we be calling it unique knowledge or does specific knowledge somehow make more sense for it?
Naval: You know, I came up with this framework when I was really young. We’re talking decades and decades. It’s now probably over 30 years old. So, at the time specific knowledge stuck with me so that is how I think about it.
The reason I didn’t try and change it is because every other term that I found for it was overloaded in a different way. At least specific knowledge isn’t that used. I can kind of rebrand it.
The problem with unique knowledge is, yeah, maybe it’s unique but if I learn it from somebody else it’s no longer unique, then we both know it. So, it’s not so much that it is unique, it’s that it is highly specific to the situation, it’s specific to the individual, it’s specific to the problem, and it can only be built as part of a larger obsession, interest, and time spent in that domain.
It can’t just be read straight out of a single book, nor can it be taught in a single course, nor can it be programmed into a single algorithm.
You can’t be too deliberate about assembling specific knowledge
Nivi: Speaking of Scott Adams, he’s got a blog post on how to build your career by getting in, say, the top 25 percentile at three or more things. And by doing that, you become the only person in the world who can do those three things in the 25th percentile.
So, instead of trying to be the best at one thing, you just try to be very, very good at three or more things. Is that a way of building specific knowledge?
Naval: I actually think the best way is just to follow your own obsession. And somewhere in the back of your mind, you can realize that, actually, this obsession I like and I’ll keep an eye out for the commercial aspects of it.
But I think if you go around trying to build it a little too deliberately, if you become too goal-oriented on the money, then you won’t pick the right thing. You won’t actually pick the thing that you love to do, so you won’t go deep enough into it.
Scott Adams’ observation is a good one, predicated on statistics. Let’s say there’s 10,000 areas that are valuable to the human race today in terms of knowledge to have, and the number one in those 10,000 slots is taken.
Someone else is likely to be the number one in each of those 10,000, unless you happen to be one of the 10,000 most obsessed people in the world that at a given thing.
But when you start combining, well, number 3,728 with top-notch sales skills and really good writing skills and someone who understands accounting and finance really well, when the need for that intersection arrives, you’ve expanded enough from 10,000 through combinatorics to millions or tens of millions. So, it just becomes much less competitive.
Also, there’s diminishing returns. So, it’s much easier to be top 5 percentile at three or four things than it is to be literally the number one at something.
Build specific knowledge where you are a natural
I think it’s a very pragmatic approach. But I think it’s important that one not start assembling things too deliberately because you do want to pick things where you are a natural. Everyone is a natural at something.
We’re all familiar with that phrase, a natural. “Oh, this person is a natural at meeting men or women, this person is a natural socialite, this person is a natural programmer, this person is a natural reader.” So, whatever you are a natural at, you want to double down on that.
And then there are probably multiple things you’re natural at because personalities and humans are very complex. So, we want to be able to take the things that you are natural at and combine them so that you automatically, just through sheer interest and enjoyment, end up top 25% or top 10% or top 5% at a number of things.
If you can do both, you will be unstoppable
Learn to sell, learn to build
Nivi: Talking about combining skills, you said that you should “learn to sell, learn to build, if you can do both, you will be unstoppable.”
Naval: This is a very broad category. It’s two broad categories. One is building the product. Which is hard, and it’s multivariate. It can include design, it can include development, it can include manufacturing, logistics, procurement, it can even be designing and operating a service. It has many, many definitions.
But in every industry, there is a definition of the builder. In our tech industry it’s the CTO, it’s the programmer, it’s the software engineer, hardware engineer. But even in the laundry business, it could be the person who’s building the laundry service, who is making the trains run on time, who’s making sure all the clothes end up in the right place at the right time, and so on.
The other side of it is sales. Again, selling has a very broad definition. Selling doesn’t necessarily just mean selling individual customers, but it can mean marketing, it can mean communicating, it can mean recruiting, it can mean raising money, it can mean inspiring people, it could mean doing PR. It’s a broad umbrella category.
The Silicon Valley model is a builder and seller
So, generally, the Silicon Valley startup model tends to work best. It’s not the only way, but it is probably the most common way, when you have two founders, one of whom is world class at selling, and one of whom is world class at building.
Examples are, of course, Steve Jobs and Steve Wozniak with Apple, Gates and Allen probably had similar responsibilities early on with Microsoft, Larry and Sergey probably broke down along those lines, although it’s a little different there because that was a very technical product delivered to end users through a simple interface.
But generally, you will see this pattern repeated over and over. There’s a builder and there’s a seller. There’s a CEO and CTO combo. And venture and technology investors are almost trained to look for this combo whenever possible. It’s the magic combination.
If you can do both you will be unstoppable
The ultimate is when one individual can do both. That’s when you get true superpowers. That’s when you get people who can create entire industries.
The living example is Elon Musk. He may not necessarily be building the rockets himself, but he understands enough that he actually makes technical contributions. He understands the technology well enough that no one’s going to snow him on it, and he’s not running around making claims that he doesn’t think he can’t eventually deliver. He may be optimistic on the timelines but he thinks this is within reasonableness for delivery.
Even Steve Jobs developed enough product skills and was involved enough in the product that he also operated in both of these domains. Larry Ellison started as a programmer and I think wrote the first version of Oracle, or was actually heavily involved in it.
Marc Andreessen was also in this domain. He may not have had enough confidence in his sales skills, but he was the programmer who wrote Netscape Navigator, or a big chunk of it. So, I think the real giants in any field are the people who can both build and sell.
I’d rather teach an engineer marketing than a marketer engineering
And usually the building is a thing that a sales person can’t pick up later in life. It requires too much focused time. But a builder can pick up selling a little bit later, especially if they were already innately wired to be a good communicator. Bill Gates famously paraphrases this as, “I’d rather teach an engineer marketing, than a marketer engineering.”
I think if you start out with a building mentality and you have building skills and it’s still early enough in your life, or you have enough focused time that you think you can learn selling, and you have some natural characteristics or you’re a good salesperson, then you can double down on those.
Now, your sales skills could be in a different than traditional domain. For example, let’s say you’re a really good engineer and then people are saying, well, now you need to be good at sales, well, you may not be good at hand-to-hand sales, but you may be a really good writer.
And writing is a skill that can be learned much more easily than, say, in-person selling, and so you may just cultivate writing skills until you become a good online communicator and then use that for your sales.
On the other hand, it could just be that you’re a good builder and you’re bad at writing and you don’t like communicating to mass audiences but you’re good one-on-one, so then you might use your sales skills for recruiting or for fundraising, which are more one-on-one kinds of endeavors.
This is pointing out that if you’re at the intersection of these two, don’t despair because you’re not going to be the best technologist and you’re not going to be the best salesperson, but in a weird way, that combination, back to the Scott Adams skill stack, that combination of two skills is unstoppable.
Long term, people who understand the underlying product and how to build it and can sell it, these are catnip to investors, these people can break down walls if they have enough energy, and they can get almost anything done.
Nivi: If you could only pick one to be good at, which one would you pick?
Naval: When you’re trying to stand out from the noise building is actually better because there’re so many hustlers and sales people who have nothing to back them up. When you’re starting out, when you’re trying to be recognized, building is better.
But much later down the line building gets exhausting because it is a focus job and it’s hard to stay current because there’s always new people, new products coming up who have newer tools, and frankly more time because it’s very intense, it’s a very focused task.
So, sales skills actually scale better over time. Like for example, if you have a reputation for building a great product, that’s good, but when you ship your new product, I’m going to validate it based on the product. But if you have a reputation for being a good person to do business with and you’re persuasive and communicative then that reputation almost becomes self-fulfilling.
So, I think if you only had to pick up one, you can start with building and then transition to selling. This is a cop-out answer, but I think that is actually the right answer.
You should be able to pick up any book in the library and read it
Read what you love until you love to read
Nivi: Before we go and talk about accountability and leverage and judgment, you’ve got a few tweets further down the line that I would put in the category of continuous learning.
They’re essentially, “there is no skill called business. Avoid business magazines and business class, study microeconomics, game theory, psychology, persuasion, ethics, mathematics and computers.”
There’s one other comment that you made in a Periscope that was, “you should be able to pick up any book in the library and read it.” And the last tweet in this category was, “reading is faster than listening, doing is faster than watching.”
Naval: Yeah, the most important tweet on this, I don’t even have in here unfortunately, which is, the foundation of learning is reading. I don’t know a smart person who doesn’t read and read all the time.
And the problem is, what do I read? How do I read? Because for most people it’s a struggle, it’s a chore. So, the most important thing is just to learn how to educate yourself and the way to educate yourself is to develop a love for reading.
So, the tweet that is left out, the one that I was hinting at is, “read what you love until you love to read.” It’s that simple.
Everybody I know who reads a lot loves to read, and they love to read because they read books that they loved. It’s a little bit of a catch-22, but you basically want to start off just reading wherever you are and then keep building up from there until reading becomes a habit. And then eventually, you will just get bored of the simple stuff.
So you may start off reading fiction, then you might graduate to science fiction, then you may graduate to non-fiction, then you may graduate to science, or philosophy, or mathematics or whatever it is, but take your natural path and just read the things that interest you until you kind of understand them. And then you’ll naturally move to the next thing and the next thing and the next thing.
Read the original scientific books in a field
Now, there is an exception to this, which is where I was hinting with what things you actually do want to learn, which is, at some point there’s too much out there to read. Even reading is full of junk.
There are actually things you can read, especially early on, that will program your brain a certain way, and then later things that you read, you will decide whether those things are true or false based on the earlier things.
So, it is important that you read foundational things. And foundational things, I would say, are the original books in a given field that are very scientific in their nature.
For example, instead of reading a business book, pick up Adam Smith’s The Wealth of Nations. Instead of reading a book on biology or evolution that’s written today, I would pick up Darwin’s Origin of the Species. Instead of reading a book on biotech right now that may be very advanced, I would just pick up The Eighth Day of Creation by Watson and Crick. Instead of reading advanced books on what cosmology and what Neil Degrasse Tyson and Stephen Hawking have been saying, you can pick up Richard Feynman’s Six Easy Pieces and start with basic physics.
Don’t fear any book
If you understand the basics, especially in mathematics and physics and sciences, then you will not be afraid of any book. All of us have that memory of when we were sitting in class and we’re learning mathematics, and it was all logical and all made sense until at one point the class moved too fast and we fell behind.
Then after that we were left memorizing equations, memorizing concepts without being able to derive them from first principles. And at that moment, we’re lost, because unless you’re a professional mathematician, you’re not going to remember those things. All you’re going to remember are the techniques, the foundations.
So, you have to make sure that you’re building on a steel frame of understanding because you’re putting together a foundation for skyscraper, and you’re not just memorizing things because you’re just memorizing things you’re lost. So the foundations are ultra important.
And the ultimate, the ultimate is when you walk into a library and you look at it up and down and you don’t fear any book. You know that you can take any book off the shelf, you can read it, you can understand it, you can absorb what is true, you can reject what is false, and you have a basis for even working that out that is logical and scientific and not purely just based on opinions.
The means of learning are abundant; the desire to learn is scarce
The beauty of the internet is the entire library of Alexandria times 10 is at your fingertips at all times. It’s not the means of education or the means of learning are scarce, the means of learning are abundant. It’s the desire to learn that’s scarce. So, you really have to cultivate the desire.
And it’s not even cultivating you’ve to not lose it. Children have a natural curiosity. If you go to a young child who’s first learning language, they’re pretty much always asking: What’s this? What’s that? Why is this? Who’s that? They’re always asking questions.
But one of the problems is that schools and our educational system, and even our way of raising children replaces curiosity with compliance. And once you replace the curiosity with the compliance, you get an obedient factory worker, but you no longer get a creative thinker. And you need creativity, you need the ability to feed your own brain to learn whatever you want.
Mathematics and logic are the basis for understanding everything else
The ultimate foundations are math and logic
Naval: Foundational things are principles, they’re algorithms, they’re deep seated logical understanding where you can defend it or attack it from any angle. And that’s why microeconomics is important because macroeconomics is a lot of memorization, a lot of macro bullshit.
As Nassim Taleb says, it is easier to macro bullshit than it is the micro bullshit. Because macroeconomics is voodoo-complex-science meets politics. You can’t find two macroeconomists to agree on anything these days, and different macroeconomists get used by different politicians to peddle their different pet theories.
There are even macroeconomists out there now peddling something called Modern Monetary Theory which basically says, hey, except for this pesky thing called inflation, we can just print all the money that we want. Yes, except for this pesky thing called inflation. That’s like saying, except for limited energy, we can fire rockets off into space all day long.
It’s just nonsense, but the fact that there are people who have “macroeconomist” in their title and are peddling Modern Monetary Theory just tells you that macroeconomics as a so-called science has been corrupted. It’s now a branch of politics.
So, you really want to focus on the foundations. The ultimate foundation are mathematics and logic. If you understand logic and mathematics, then you have the basis for understanding the scientific method. Once you understand the scientific method, then you can understand how to separate truth from falsehood in other fields and other things that you’re reading.
It’s better to read a great book slowly than to fly through a hundred books quickly
So, be very careful about reading other people’s opinions and even be careful when reading facts because so-called facts are often just opinions with a veneer [of pseudoscience] around them.
What you are really looking for are algorithms. What you are really looking for is understanding. It’s better to go through a book really slowly and struggle and stumble and rewind, than it is to fly through it quickly and say, “Well, now I’ve read 20 books, I’ve read 30 books, I’ve read 50 books in the field.”
It’s like Bruce Lee said, “I don’t fear the man who knows a thousand kicks and a thousand punches, I fear the man who’s practiced one punch ten thousand times or one kick ten thousand times.” It’s that understanding that comes through repetition and through usage and through logic and foundations that really makes you a smart thinker.
Learn persuasion and programming
Nivi: To lay a foundation for learning for the rest of your life I think you need two things, if I was going to try and sum it up. One, practical persuasion and two, you need to go deep in some technical category, whether it’s abstract math, or you want to read Donald Knuth’s books on algorithms, or you want to read Feynman’s lectures on physics.
If you have practical persuasion and a deep understanding of some complex topic, I think you’ll have a great foundation for learning for the rest of your life.
Naval: Yeah. In fact let me expand that a little bit. I would say that the five most important skills are of course, reading, writing, arithmetic, and then as you’re adding in, persuasion, which is talking. And then finally, I would add computer programming just because it’s an applied form of arithmetic that just gets you so much leverage for free in any domain that you operate in.
If you’re good with computers, if you’re good at basic mathematics, if you’re good at writing, if you’re good at speaking, and if you like reading, you’re set for life.
Avoid business schools and magazines
There’s no actual skill called ‘business’
Naval: In that sense, business to me is bottom of the barrel. There’s no actual skill called business, it’s too generic. It’s like a skill called “relating.” Like “relating to humans.” That’s not a skill, it’s too broad.
A lot of what goes on in business schools, and there is some very intelligent stuff taught in business schools – I don’t mean to detract from them completely – some of the things taught in business school are just anecdotes. They call them “case studies.”
But they’re just anecdotes, and they’re trying to help you pattern match by throwing lots of data points at you, but the reality is, you will never understand them fully until you’re actually in that position yourself.
Even then you will find that basic concepts from game theory, psychology, ethics, mathematics, computers, and logic will serve you much, much better.
I would focus on the foundations, I would focus with a science bent. I would develop a love for reading, including by reading so-called junk food that you’re not supposed to read. You don’t have to read the classics. That [reading] is the foundation for your self-education.
Doing is faster than watching
Nivi: What did you mean when you said that “doing is faster than watching?”
Naval: When it comes to your learning curve, if you want to optimize your learning curve… One of the reasons why I don’t love podcasts, even though I’m a generator of podcasts, is that I like to consume my information very quickly.
And I’m a good reader, or a fast reader and I can read very fast but I can only listen at a certain speed. I know people listen at 2x, 3x, but everyone sounds like a chipmunk and it’s hard to go back, it’s hard to highlight, it’s hard to pinpoint snippets and save them in your notebook, and so on.
Similarly, a lot of people think they can become really skilled at something by watching others do it, or even by reading about others doing it. And going back to the business school case study, that’s a classic example.
They study other people’s businesses, but in reality, you’re going to learn a lot more about running a business by operating your own lemonade stand or equivalent. Or even opening a little retail store down the street.
That is how you’re going to learn on the job because a lot of the subtleties don’t express themselves until you’re actually in the business.
For example, everyone’s into mental models these days. You go to Farnam Street, you go to Poor Charlie’s Almanack, and you can learn all the different mental models. But which ones matter more? Which ones do you apply more often? Which ones matter in which circumstances? That’s actually the hard part.
For example, my personal learning has been that the principal-agent problem drives so much in this world. It’s an incentives problem. I’ve learned that tit-for-tat iterated prisoner’s dilemma is the piece of game theory that is worth knowing the most. You can almost put down the game theory book after that.
By the way, the best way to learn game theory is to play lots of games. I never even read game theory books. I consider myself extremely good at game theory. I’ve never opened up a game theory book and found a result in there where I didn’t think, “Oh, yeah, that’s common sense to me.”
The reason is that I grew up playing all kinds of games and I ran into all kinds of corner cases with all kinds of friends, and so it’s just second nature to me. You can always learn better by doing it on the job.
The number of ‘doing’ iterations drives the learning curve
But doing is a subtle thing. Doing encapsulates a lot. For example, let’s say, I want to learn how to run a business. Well, if I start a business where I go in every day and I’m doing the same thing, let’s say I’m running a retail store down the street where I’m stocking the shelves with food and liquor every single day, I’m not going to learn that much because I’m repeating things a lot.
So, I’m putting in thousands of hours, but they are thousands of hours doing the same thing. Whereas if I was putting in thousands of iterations, that would be different. So, the learning curve is across iterations [not iterations].
So if I was trying new marketing experiments in the store all the time, I was constantly changing up the inventory, I was constantly changing up the branding and the messaging, I was constantly changing the sign, I was constantly changing the online channels that are used to drive foot traffic in, I was experimenting with being open at different hours, I had the ability to walk around and talk to other store owners and getting their books and figure out how they run their businesses.
It’s the number of iterations that drives the learning curve. So, the more iterations you can have, the more shots on goal you can have, the faster you’re going to learn. It’s not just about the hours put in.
If you’re willing to bleed a little every day, you may win big later
It’s actually a combination of the two, but I think just the way we’re built and the way that the world presents itself, the world offers us very easily the opportunity to do the same thing over and over and over again. But really, we’d be better served if we went off and found ways to do new things from scratch.
And doing something new the first time is painful, because you’re wandering into uncertain territory and high odds are that you will fail. So you just have to get very, very comfortable with frequent small failures.
Nassim Taleb talks about this also. He made his fortune, his wealth by being a trader who basically relied upon black swans. Nassim Taleb made money by losing little bits of money every day and then once in a blue moon he would make a lot of money when the unthinkable happened for other people.
Whereas most people want to make little bits of money every day and in exchange they’ll tolerate lots of blow-up risk, they’ll tolerate going completely bankrupt.
We’re not evolved to bleed a little bit every day. If you’re out in the natural environment, and you get a cut and you’re literally bleeding a little bit every day, you will eventually die. You’ll have to stop that cut.
We’re evolved for small victories all the time but that becomes very expensive. That’s where the crowd is. That’s where the herd is. So, if you’re willing to bleed a little bit every day but in exchange you’ll win big later, you will do better.
That is, by the way, entrepreneurship. Entrepreneurs bleed every day.
They’re not making money, they’re losing money, they’re constantly stressed out, all the responsibility is upon them, but when they win they win big. On average they’ll make more.
Take risks under your own name and society will reward you with leverage
You need accountability to get leverage
Nivi: Why don’t we jump into accountability, which I thought was pretty interesting and I think you have your own unique take on it. So the first tweet on accountability was, “Embrace accountability and take business risks under your own name. Society will reward you with responsibility, equity, and leverage.”
Naval: Yeah. So to get rich, you’re going to need leverage. Leverage comes in labor, comes in capital, or it can come through code or media. But most of these, like labor and capital, people have to give to you. For labor, somebody has to follow you. For capital, somebody has to give you money or assets to manage or machines.
So to get these things, you have to build up credibility and you have to do those under your own name as much as possible, which is risky. So accountability is a double-edged thing. It allows you to take credit when things go well and to bear the brunt of the failure when things go badly.
Take business risks under your own name
So in that sense, people who are stamping their names on things aren’t foolish. They’re just confident. Maybe it turns out to be foolish in the end, but if you look at a Kanye or an Oprah or a Trump or an Elon or anyone like that, these people can get rich just off their name because their name is such powerful branding.
Regardless of what you think of Trump, you have to realize that the guy was among the best in the world at just branding his name. Why would you go to Trump Casino? Used to be because Trump. Why would you go to a Trump tower? Because of Trump.
When it came time to vote, I think that a lot of voters just went in and said, “Trump.” They recognize the name, so the name recognition paid off.
Same thing with Oprah. She puts her brand on something, her name on something and it flies off the shelves, and it’s like an instant validator.
These people also take risks for putting their name out there. Obviously Trump is now probably hated by half or more than half of the country and by a big chunk of the world as he sticks his name out there.
By putting your name out there, you become a celebrity, and fame has many, many downsides. It’s better to be anonymous and rich than to be poor and famous, but even famous and rich has a lot of downsides associated with it. You’re always in the public eye.
A well-functioning team has clear accountability for each position
It may seem like the things in this podcast are far too idealistic, but maybe it can inform your weekend projects. Maybe it can inform your approach to education; for example, if you’re taking an online course at night. Maybe it can inform what roles you take on at your current company, because they move you closer and closer to points of leverage, points of judgment or points where you’re naturally talented, and you’re able to be more authentic. It might cause you to take on more accountability.
Even if applied piecemeal, these principles can guide you—regardless of what stage of life you are in, short of retirement. If you’re retired, test them to see if they’re true and then teach them to your kids or grandkids.
There are many different ways to participate. It should apply to almost everybody who has a complete body, sound mind, and is looking to work.
Look up the value chain to find leverage
Nivi: One way to apply this advice is to look at who is getting leverage off of the work that you’re doing. Look up the value chain—at who’s above you and who’s above them—and see how they are taking advantage of the time and work you’re doing and how they’re applying leverage.
People naturally do this because they want to move up the corporate ladder; but that’s mostly about managing other people. You want to manage more capital, products, media and community.
People think about moving up the ladder in their organization. But they don’t often think about moving to a different organization or creating their own company to get more leverage.
You will do better in a small organization
Naval: In general, ceteris paribus—fancy Latin words for “all other things equal”—you will do better in a smaller organization than a larger one.
You will have more accountability, and your work will be more visible. You’re more likely to be able to try different things, which can help you discover the thing you are uniquely good at. People will be more likely to give you leverage through battlefield promotions. You’ll have more flexibility. There will be more authenticity in how the company operates.
Here is a good progression for a career: Start in a large company and progressively move to smaller and smaller ones. It’s very hard to go from a small company to a larger company. Larger companies tend to be more about politics than merit; they’re more stable but less innovative.
The goal is that we are all working for ourselves
The long-term goal is that we are all wealthy and working for ourselves. The people working for us are essentially robots. Today that’s software robots executing code in data centers. Tomorrow it could be delivery bots, flying bots and mechanical bots—and drones—that are carrying things around.
This goes back to the idea that the best relationships are peer relationships. If there’s someone above you, that’s someone to learn from. If you’re not learning from them and improving, nobody should be above you.
If there’s somebody below you, it’s because you’re teaching them and enabling them. If you’re not doing that, then get a robot; you don’t need a human below you.
This is utopian and still a long way off, but in the not-too-distant future anybody who wants to work for themself will be able to do it.
You may have to make sacrifices and take on more risk. You may have to take on more accountability and live with less steady income. But more and more I think younger people are realizing that if they’re going to work, they’re going to work for themselves.
If you cut fair deals, you will get paid in the long run
Ethics isn’t something you study; it’s something you do
Nivi: In the “How to Get Rich” tweetstorm you listed things you suggest people study, like programming, sales, reading, writing and arithmetic. One of the items that ended up on the cutting-room floor was ethics, which you also suggest people study.
Naval: I was going to put that out as a concession to people who believe making money is evil and that the only way to make it is to be evil. But then I realized ethics is not necessarily something you study. It’s something you think about—and something you do.
Everyone has a personal moral code. Where we get our moral code differs for everybody. It’s not like I can point you to a textbook. I can point you to some Roman or Greek text, but that’s not suddenly going to make you ethical.
There’s the Golden Rule: “Do unto others as you would have them do unto you.” Or there’s Nassim Taleb’s Silver Rule, which is, “Don’t do unto others what you don’t want them doing unto you. ”
Trust leads to compounding relationships
Once you’ve been in business long enough, you will realize how much of it is about trust. It’s about trust because you want to compound interest. You want to work with trustworthy people for long periods of time without having to reevaluate every discussion or constantly look over your shoulder.
Over time you will gravitate to working with certain kinds of people. Similarly, those people will gravitate to working with other ethical people.
Being ethical attracts other long-term players
Acting ethically turns out to be a selfish imperative. You want to be ethical because it attracts other long-term players in the network. They want to do business with ethical people.
If you build a reputation for being ethical, people eventually will pay you just to do deals through you. Your involvement will validate deals and ensure they get done; because you wouldn’t be involved with low-quality stuff.
In the long-run, being ethical pays off—but it’s the very long run. In the short-run, being unethical pays off, which is why so many people go for it. It’s short-term greedy.
Being ethical is long-term greedy
You can be ethical simply because you’re long-term greedy. I can even outline a framework for different parts of ethics just based on the idea of long-term selfishness.
For example, you want to be honest because it leaves you with a clear mind. You don’t want two threads running in your head, one with the lies you tell —and now have to keep track of—and the other with the truth. If you are honest, you only have to think about one thing at a time, which frees up mental energy and makes you a clearer thinker.
Also, by being honest you’re rejecting people who only want to hear pretty lies. You force those people out of your network. Sometimes it’s painful, especially with friends and family. But over the long-term you create room for the people who like you exactly the way that you are. That is a selfish reason to be honest.
If you cut fair deals, you will get paid in the long run
Negotiations offer another good example. If you’re the kind of person who always tries to get the best deal for yourself, you will win a lot of early deals and it will feel very good.
On the other hand, a few people will recognize that you’re always scrabbling and not acting fairly, and they will tend to avoid you. Over time those are the people who end up being the dealmakers in the network. People go to them for a fair shake or to figure out what’s fair.
If you cut people fair deals, you won’t get paid in the short-term. But over the long-term, everybody will want to deal with you. You end up being a market hub. You have more information. You have trust. You have a reputation. And people end up doing deals through you in the long-run.
A lot of wisdom involves realizing long-term consequences of your actions. The longer your time horizon, the wiser you’re going to seem to everybody around you.
Envy can give you a powerful boost, or it can eat you alive
Suffering through the wrong thing can motivate you to find the right thing
Nivi: Do you want to tell us about jobs you had growing up and the one that kicked off your fanatical obsession with creating wealth?
Naval: This gets a little personal, and I don’t want to humble-brag. There was a thread going around Twitter—Name Five Jobs You’ve Held—and every rich person on there was signaling how they’ve held normal jobs. I don’t want to play that game.
I’ve had menial jobs. There are people who had it worse than me and people who had it better than me.
At one point in college I was washing dishes in the school cafeteria and said, “F this. I hate this. I can’t do this anymore.” I sweet-talked may way into a teaching assistant job for a computer science professor, even though I was completely unqualified. The job forced me to learn computer algorithms, so I could TA the rest of the course.
So my desire to learn computer algorithms came out of the suffering I experienced washing dishes—not that there’s anything wrong with washing dishes; it just wasn’t for me.
I had an active mind. I wanted to make money and earn a living through mental activities, not through physical activities. Sometimes it takes suffering through the wrong thing to motivate you to find the right thing.
Being a lawyer was not what I was meant to do
Back in the day I had a prestigious internship at a big New York City law firm. I basically got fired for surfing Usenet.
This was before the Internet was a big thing. Usenet hosted newsgroups, and it was the only the only thing keeping me from being completely bored. I was an overpaid intern wearing a suit and tie. I got to hang out in the conference room and make photocopies when lawyers needed them.
I was bored out of my skull. This was pre-iPhone (thank God for Steve Jobs for saving us all from unending boredom). I used to read The Wall Street Journal or anything I could get my hands on. I would’ve read the back of a brochure to keep from going insane, because listening to a bunch of corporate lawyers discuss how to optimize details of a contract is really dull.
They wanted me to sit there quietly and not read the paper. They got mad and said, “That’s rude. That’s misbehavior.”
I got called up and reprimanded a bunch of times. I was finally terminated—sent home in shame from my prestigious internship, destroying my chance to go to law school.
I was unhappy… for all of an hour. Ultimately, it’s one of the best things that ever happened to me. Otherwise, I would have ended up a lawyer. Not that I have anything against lawyers; it’s just not what I was meant to do.
Envy can be useful or it can eat you alive
Nivi: You mentioned a catering job that kicked off your obsession with wealth.
Naval: That was an envy thing. When I was in high school, I needed a job to pay for my first semester of college.
It was the summer of 1990 or 1991. This was the Bush Senior recession—if anyone listening was alive back then to remember it—so it was actually really hard to get a job.
I ended up working for a catering company serving Indian food. One day, I had to serve at a birthday party for a kid in my school. So I was out there serving food and drinks to all of my classmates. That was incredibly embarrassing. I wanted to hide away and die right there.
But you know what? It’s all part of the plan. It’s all part of the motivation. If that didn’t happen, I probably wouldn’t be as motivated or as successful. It’s all fine. It was definitely a strong motivator.
In that sense, envy can be useful. Envy also can eat you alive if you let it follow you around your entire life. But there are points in your life when it can be a powerful booster rocket.
If you think and act like an owner, it’s only a matter of time until you become an owner
A principal is an owner; an agent is an employee
Nivi: We spoke earlier about picking a business model that has leverage from scale economies, network effects and zero marginal cost of replication. There were a few other ideas on the cutting-room floor that I want to go through with you. The first one is the principal-agent problem.
Naval: So mental models are all the rage. Everyone’s trying to become smarter by adopting mental models. I think mental models are interesting, but I don’t think explicitly in terms of mental-model checklists. I know Charlie Munger does, but that’s just not how I think.
Instead, I tend to focus on the few lessons I’ve learned over and over in life that I think are incredibly important and seem to apply almost universally. One that keeps coming up from microeconomics—because as we’ve established, macroeconomics is not really worth spending time on—is what’s called the principal-agent problem.
In this case it’s a principal, who is a person; rather than a principle that you would follow. A principal is an owner. An agent works for the owner, so you can think of an agent as an employee. The difference between a founder and an employee is the difference between a principal and an agent.
A principal’s incentives are different than an agent’s incentives
I can summarize the principal-agent problem with a famous quote attributed to Napoleon or Julius Caesar:
“If you want it done, Go. If not, Send.”
Which is to say: If you want to do something right, do it yourself; because other people just don’t care enough.
Now, the principal-agent problem pops up everywhere. In microeconomics, they try to characterize it this way: The principal’s incentives are different than the agent’s incentives, so the owner of the business wants what is best for the business and will make the most money. The agent generally wants whatever will look good to the principal, or might make them the most friends in the neighborhood or in the business, or might make them personally the most money.
You see this a lot with hired-gun CEOs running public companies, where the ownership of the public company is distributed so widely that there’s no principal remaining. Nobody owns more than 1% of the company. The CEO takes charge, stuffs the board with their buddies and then starts issuing themself low-price stock options, or doing a lot of stock buybacks because their compensation is based directly tied to the stock price.
If you can work on incentives, don’t work on anything else
Agents have a way of hacking systems. This is what make incentive design so difficult. As Charlie Munger says, if you could be working on incentives, don’t work on anything else.
Almost all human behavior can be explained by incentives. The study of signaling is seeing what people do despite what they say. People are much more honest with their actions than they are with their words. You have to get the incentives right to get people to behave correctly. It’s a very difficult problem because people aren’t coin-operated. The good ones are not just looking for money—they’re also looking for things like status and meaning in what they do.
As a business owner you are always going to be dealing with the principal-agent problem. You’re always going to be trying to figure out: How do I make this person think like me? How do I incent them? How do I give them founder mentality?
Only founders can fully appreciate the importance of a founder mentality and just how difficult and gnarly principal-agent problem is.
When you do deals, it’s better to have the same incentives
If you are a principal, you want to spend a lot of your time thinking about this problem. You want to be generous with your top lieutenants—in terms of ownership and incentives—even if they don’t necessarily realize it; because over time they will and you want them to be aligned with you.
When you do business deals, it’s better to have an aligned partnership where you both have the same incentives than a partnership where you have the advantage in the deal. Because eventually the other person will figure it and the partnership will fall apart. Either way, it’s not going to be one of those things that you can invest in and enjoy the benefits of compound interest over decades.
If you’re an employee, your most important job is to think like a principal
Finally, if you’re in a role where you’re an agent—you’re an employee—then your most important job is to think like a principal. The more you can think like a principal, the better off you’re going to be long-term. Train yourself how to think like a principal, and eventually you will become a principal. If you align yourself with a good principal, they will promote you or empower you or give you accountability or leverage that may be way out of proportion to your relatively menial role.
I’m always impressed by founders who promote young people through the ranks and allow them to skip multiple levels despite their lack of experience. Invariably it happens because this agent—who’s way deep down in the organization—thinks like a principal.
If you can hack your way through the principal-agent problem, you’ll probably solve half of what it takes to run a company.
Nivi: The reason I asked about this one first is because I feel like I never see the principal-agent problem in my work. I tend to work in small teams where everybody is highly economically aligned, and the people have been filtered for a commitment to the mission, and everybody else who doesn’t work out moves on to another role elsewhere.
Naval: These are all heuristics that you have designed to avoid having to deal with the single biggest problem in management.
Deal with small firms to avoid the principal-agent problem
Another example of a heuristic that helps you route around the principal-agent problem is to deal with the smallest firms possible. For example, when I hire a lawyer or a banker or even an accountant to work on my deals, I’ve become very cognizant about the size of the firm. Bigger firms—all other things being equal—are generally worse than small ones.
Yes, the big firm has more experience. Yes, they have more people. Yes, they have a bigger brand. But you’ll find the principal and the agent are highly separated. Very often the principal will sell you and convince you to work with the firm, but then all the work will be done by an agent who simply doesn’t care as much. You end up getting substandard service.
I prefer to work with boutiques. My ideal law firm is a law firm of one. My ideal banker is a solo banker. Now, you’re making other sacrifices and trade-offs in terms of that person’s resources—and you are betting big on that person. But you’ve got one throat to choke. There’s no one else to point fingers at; there’s nowhere to run. The accountability is extremely high.
If you are an agent, the best way to operate is to ask, “What would the founder do?” If you think like the owner and you act like the owner, it’s only a matter of time until you become the owner.
Don’t ruin your reputation or get wiped to zero
Don’t bet everything on one big gamble
Nivi: Let’s chat about the Kelly criterion.
Naval: The Kelly criterion is a popularized mathematical formulation of a simple concept. The simple concept is: Don’t risk everything. Stay out of jail. Don’t bet everything on one big gamble. Be careful how much you bet each time, so you don’t lose the whole kitty.
If you’re a gambler, the Kelly criterion mathematically formulates how much you should wager per hand, even if you have an edge—because even when you have an edge, you can still lose. Let’s say you have 51-to-49 edge. Every gambler knows not to bet the whole kitty on that 51-to-49 edge—because you could lose everything and won’t get to come back to the average.
Nassim Taleb famously talks about ergodicity, which is a fancy word for a simple concept: What is true for 100 people on average isn’t the same as one person averaging that same thing 100 times.
Ruining your reputation is the same as getting wiped to zero
The easiest way to see that is with Russian roulette. Say six people play Russian roulette one time each, and each winner gets $1 billion. One person ends up dead and five people get $1 billion. Compare that to one person playing Russian roulette six times with the same gun. They are never going to end up a billionaire—they will be dead and worth zero. So risk-taking—especially when the averages that are calculated across large populations—is not always rational.
The Kelly criterion helps you avoid ruin. The number one way people get ruined in modern business is not by betting too much; it’s by cutting corners and doing unethical or downright illegal things. Ending up in an orange jumpsuit in prison or having a reputation ruined is the same as getting wiped to zero—so never do those things.
People who can’t communicate can cooperate by anticipating the other person’s actions
Use social norms to cooperate when you can’t communicate
Nivi: Let’s talk about Schelling points.
Naval: The Schelling point is a game theory concept made famous by Thomas Schelling in his book, The Strategy of Conflict, which I recommend.
It’s about multiplayer games where people respond based on what they think the other person’s response will be. He came up with a mathematical formalization to answer: How do you get people who cannot communicate with each other to coordinate?
Suppose I want to meet with you, but I don’t tell you where or when to meet. You also want to meet with me, but we can’t communicate. That sounds like an impossible problem to solve—we can’t do it. But not quite.
You can use social norms to converge on a Schelling point. I know you’re rational and educated. And you know I’m rational and educated. We’re both going to start thinking.
When will we meet? If we have to pick an arbitrary date, we’ll probably pick New Year’s Eve. What time will we meet? Midnight or 12:01 a.m. Where will we meet? If we’re Americans, the big meeting spot is probably New York City, the most important city. Where in New York City will we meet? Probably under the clock at Grand Central Station. Maybe you end up at the Empire State Building, but not likely.
You can find Schelling points in business, art and politics
There are many games—whether it’s business or art or politics—where you can find a Schelling point. So you can cooperate with the other person, even when you can’t communicate.
Here’s a simple example: Suppose two companies are competing heavily and hold an oligopoly. Let’s say the price fluctuates between $8 and $12 for whatever the service is. Don’t be surprised if they converge on $10 without ever talking to each other.
Improve your leverage by turning short-term relationships into long-term ones
Pareto optimal solutions require a trade-off to improve any criterion
Nivi: Do you want to talk about Pareto optimal?
Naval: Pareto optimal is another concept from game theory, along with Pareto superior.
Pareto superior means something is better in some ways while being equal or better in other ways. It’s not worse in any way. This is an important concept when you’re negotiating. If you can make a solution Pareto superior to where it was before, you will always do that.
Pareto optimal is when the solution is the best it can possibly be and you can’t change it without making it worse in at least one dimension. There is a hard trade-off from this point forward.
These are important concepts to understand when you’re involved in a big negotiation.
Negotiations are won by whoever cares less
I generally say, though: “Negotiations are won by whoever cares less.” Negotiation is about not wanting it too badly. If you want something too badly, the other person can extract more value from you.
If someone is taking advantage of you in a negotiation, your best option is to turn it from a short-term game into a long-term game. Try to make it a repeat game. Try to bring reputation into the negotiation. Try to include other people who may want to play games with this person in the future.
An example of a high-cost, low-information single-move game is having your house renovated.
Contractors are notorious for overbooking, ripping people off, and being unaccountable. I’m sure contractors have their own side to it: “The homeowner has unreasonable demands.” “We found problems.” “The homeowner doesn’t want to pay for it.” “They don’t understand; they’re low-information buyers.”
It’s an expensive transaction. Historically it’s been very hard to find good contractors; and the contractor has little information on the homeowner.
Convert single-move games to multi-move games
So you try to go through friends. You try to find people with good reputations. You’re converting an expensive single-move game with a high probability of cheating on both sides into a multi-move game.
One way to do that is to say: “Actually, I need two different projects done. The first project we’ll do together, and based on that I’ll decide if we do the second project.”
Another way is to say: “I’m going to do this project with you, and I have three friends who want projects done who are waiting to see the outcome of this project.”
Another way is to write a Yelp or Thumbtack review—especially if the contractor operates within a community and wants to protect their reputation in that community.
These are all ways to turn a single-move game into a longer term game and get past a position of poor negotiating leverage and poor information.
Life gets a lot easier when you know someone’s got your back
Mutual trust makes it easy to do business
Relationships offer a good example of compound interest. Once you’ve been in a good relationship with somebody for a while—whether it’s business or romantic—life gets a lot easier because you know that person’s got your back. You don’t have to keep questioning.
If I’m doing a deal with someone I’ve worked with for 20 years and there is mutual trust, we don’t have to read the legal contracts. Maybe we don’t even need to create legal contracts; maybe we can do it with a handshake. That kind of trust makes it very easy to do business.
If Nivi and I start another company and things aren’t working out, I know we’re both going to be extremely reasonable about deciding what to do—how to exit or shut it down. Or if we’re scaling it, how to bring in new people. We have mutual trust, and that allows us to start businesses more easily and compounds the effect.
The most under-recognized reason startups fail is because the founders fall apart.
A startup is so difficult to pull off, so removing potential friction points between founders can be the difference between success and failure.
It’s better to have a few compounding relationships than many shallow ones
Nivi: There are a couple of non-intuitive things about compounding. The first is that most of the benefits come at the end, so you may not see huge benefits up front.
Sam Altman wrote, “I always want it to be a project that, if successful, will make the rest of my career look like a footnote.” Again, most of the benefits of compounding come at the end.
Another thing that’s non-intuitive about compounding: It’s better to have a few deep compounding relationships than many shallow, non-compounding relationships.
It takes just as much effort to create a small business as a large one
Naval: One thing about business that people don’t realize: it takes just as much effort to create a small business as it does to create a large one.
Whether you’re Elon Musk or the guy running three Italian restaurants in town, you’re working 80 hours a week; you’re sweating bullets; you’re hiring and firing people; you’re trying to balance the books; it’s highly stressful; and it takes years and years of your life.
In one case, you get companies worth $50-$100 billion and everyone’s adulation. In the other, you might make a little bit of money and you’ve got some nice restaurants. So think big.
You can charge people for extras based on their propensity to pay
Price discrimination is a technique for charging certain people more
Nivi: Are there any other microeconomic concepts, outside of zero marginal cost of replication and scale economies, that are important to understand?
Naval: Price discrimination is important. It means you can charge people based on their propensity to pay.
Now, you can’t charge people different amounts just because you don’t like them. You have to offer them something extra. But it has to be something rich people care about.
Business-class seats routinely cost five or 10 times more than economy seats. But it costs the airline much less—maybe two or three times more than a standard seat—to provide perks like wider seats, more legroom and free drinks.
Rich people and large enterprises are willing to pay more
Price discrimination works because rich people are willing to pay more. You just have to give them the extra little things they need to signal they’re rich or that little bit of comfort they want.
A lot of enterprise software companies use price discrimination, especially with freemium products. The free or low-price version will do almost everything you want. But if you want the version that’s extra secure or hosted on your site or has multiple-user administration so the IT person can monitor everything, you’ll find yourself paying 10 or 100 times more.
People are willing to pay more than what companies charge
Consumer surplus is the extra value you get when you pay less than you were willing
Naval: Consumer surplus and producer surplus are important concepts. Consumer surplus is the excess value you get from something when you pay less than you were willing to pay.
I get a lot of joy out of my morning Starbucks coffee. Obviously I’ve made some money. So if my coffee cost $20, I would pay it.
But Starbucks doesn’t know that. They can’t price the coffee at $20 just for me, because they’re selling the exact same product to others. So I’m getting a lot of consumer surplus out of the coffee.
All businesses generate consumer surplus. It’s a good thing to keep in mind when someone’s harping on about how evil companies are. Amazon might be a trillion-dollar company, but I’ll bet they’re generating trillions of dollars in consumer surplus through people’s willingness to pay for convenience. A lot of people are willing to pay more than what Amazon charges.
See what future income is worth today by applying a discount to its future value
Figure out what future income is worth today by applying a discount rate
Nivi: Let’s talk about net present value (NPV).
Naval: Net present value is when you say, “That stream of payments I’m going to get in the future—what’s it worth today?”
Here’s a common example: You’re joining a startup and getting stock options, and the founder says, “This company is going to be worth $1 billion, and I’m giving you 0.1% of the company; therefore, you’re getting $1 million worth of stock.”
The founder is negotiating based on what it’s going to be worth in the future. You have to figure out what it’s worth today by applying a discount rate, or an interest rate, that accounts for the massive risk startups face.
You’ll end up with the amount the company is actually worth today. That’s the price at which a venture capitalist would invest in the company.
If the founder recently raised a round at a $10 million valuation, then the company’s only worth 1% of what the founder says it will be worth. So your $1 million package is actually worth $10,000. You should get very comfortable doing rough net present value calculations in your head.
Externalities let you account for the true cost of products by including hidden costs
Nivi: What’s a mispriced externality? You mentioned it on a previous episode.
Naval: An externality is where there’s an additional cost imposed by whatever product is being produced or consumed, that’s not accounted for in the price of the product. This can happen for many reasons. Sometimes you can fix it by putting the cost back into the price.
Some of the most ardent critics of capitalism argue it’s destroying the environment. If you throw away capitalism because it’s destroying the environment, then guess what—we’re all headed back to pre-industrial times. That’s not going to be a good thing.
Pricing externalities properly is more effective than feel-good measures
Because the environment is finite and precious, we have to price it properly and fold that back into the cost of products and services.
If people are wasting water, releasing hydrocarbons into the atmosphere or polluting in other ways, society should charge them what it costs to clean up the pollution and return the environment to a pristine state. Perhaps that price has to be very, very, very high.
If you raise the price high enough, you’ll knock out pollution. That’s much better than feel-good measures like banning plastic bags or restricting showers during a drought.
Properly pricing externalities can save resources in a tremendous way
California likes to run declarations and ads to scare people into avoiding showers during droughts. It would be better to raise the price of fresh water. The average consumer might pay a few pennies more for a shower, but the almond farmers—who consume a lot of water—will cut back; and almond farming may move to a part of the country where water is more abundant.
Properly pricing externalities can save resources in a tremendous way. It’s a good framework to use when you want to do things like save the environment, rather than doing feel-good things that won’t actually amount to anything.
If you have to work a “normal job,” take on accountability to build your specific knowledge
Nivi: A common question we get: “How do I find the time to start investing in myself? I have a job.”
You have to rent your time to get started
In one of the tweets from the cutting room floor, you wrote: “You will need to rent your time to get started. This is only acceptable when you are learning and saving. Preferably in a business where society does not yet know how to train people and apprenticeship is the only model.”
Naval: Try to learn something that people haven’t quite figured out how to teach yet. That can happen if you’re working in a new and quickly expanding field. It’s also common in fields that are circumstantial—where the details matter and it’s always moving. Investing is one of those fields; so is entrepreneurship.
Chief of staff for a founder is one of the most coveted jobs for young people starting out in Silicon Valley. The brightest kids will follow an entrepreneur around and do whatever he or she needs them to do.
In many cases, the person is way overqualified. Someone with multiple graduate degrees might be running the CEO’s laundry because that’s the most important thing at the moment.
At the same time, that person gets to attend the most important meetings. They are privy to all the stress and theatrics, the fundraising decks and the innovation—knowledge that can only come from being in the room.
Coming out of college, Warren Buffett wanted to work for Benjamin Graham to learn to be a value investor. Buffett offered to work for free, and Graham responded, “You’re overpriced.” What that means is you have to make sacrifices to take on an apprenticeship.
Find the part of the job with the steepest learning curve
If can’t learn in an apprenticeship model because you need to make money, try to be innovative in the context of your job. Take on new challenges and responsibilities. Find the part of the job with the steepest learning curve.
You want to avoid repetitive drudgery—that’s just biding time until your job is automated away.
If you’re a barista at the coffee shop, figure out how to make connections with the customers. Figure out how to innovate the service you offer and delight the customer. Managers, founders and owners will take notice.
Develop a founder mentality
The hardest thing for any founder is finding employees with a founder mentality. This is a fancy way of saying they care enough.
People will say, “Well, I’m not the founder. I’m not being paid enough to care.” Actually, you are: The knowledge and skills you gain by developing a founder mentality set you up to be a founder down the line; that’s your compensation.
You can get a lot out of almost any position. You just have to put a lot into it.
Accountability is something you can take on immediately
Nivi: We’ve discussed accountability, judgment, specific knowledge and leverage. If I’m working a “normal” job, is specific knowledge the one I should focus on?
Naval: Judgment takes experience. It takes a lot of time to build up. You have to put yourself in positions where you can exercise judgment. That’ll come from taking on accountability.
Leverage is something that society gives you after you’ve demonstrated judgment. You can get it faster by learning high-leverage skills like coding or working with the media. These are permissionless leverage. This is why I encourage people to learn to code or produce media, even if it’s just nights and weekends.
So, judgment and leverage tend to come later. Accountability is something you can take on immediately. You can say, “Hey, I’ll take charge of this thing that nobody wants to take charge of.” When you take on accountability, you’re also publicly putting your neck on the chopping block—so you have to deliver.
You build specific knowledge by taking accountability for things that other people don’t know how to do. Perhaps they’re things you enjoy doing or are naturally inclined towards doing anyway.
If you work in a factory, the hardest thing may be raising capital to keep the factory running. Maybe that’s what the owner is always stressed out about.
You might notice this and think, “I’m good at balancing my checkbook and have a good head for numbers; but I haven’t raised money before.” You offer to help and become the owner’s sidekick solving their fundraising problem. If you have a natural aptitude and take on accountability, you can put yourself in a position to learn quickly. Before long, you’ll become the heir apparent.
Early on, find things that interest you and allow you to take on accountability. Don’t worry about short-term compensation. Compensation comes when you’re tired of waiting for it and have given up on it. This is the way the whole system works.
If you take on accountability and solve problems on the edge of knowledge that others can’t solve, people will line up behind you. The leverage will come.
Specific knowledge can be timely or timeless
There are two forms of specific knowledge: timely and timeless.
If you become a world-class expert in machine learning just as it takes off and you got there through genuine intellectual interest, you’re going to do really well. But 20 years from now, machine learning may be second hat; the world may have moved on to something else. That’s timely knowledge.
If you’re good at persuading people, it’s probably a skill you picked up early on in life. It’s always going to apply, because persuading people is always going to be valuable. That’s timeless knowledge.
Now, persuasion is a generic skill—it’s probably not enough to build a career on. You need to combine it in a skill stack, as Scott Adams writes. You might combine persuasion with accounting and an understanding of semiconductor production lines. Now you can become the best semiconductor salesperson and, later on, the best semiconductor company CEO.
Timeless specific knowledge usually can’t be taught, and it sticks with you forever. Timely specific knowledge comes and goes; but it tends to have a fairly long shelf life.
Technology is a good place to find those timely skills sets. If you can bring in a more generic specialized knowledge skill set from the outside, then you’ve got gold.
Technology is an intellectual frontier for gaining specific knowledge
Nivi: There were a couple other tweets from the cutting-room floor on this topic. The first: “The technology industry is a great place to acquire specific knowledge. The frontier is always moving forward. If you are genuinely intellectually curious, you will acquire the knowledge ahead of others.”
Naval: Danny Hillis famously said technology is everything that doesn’t work yet. Technology is around us everywhere. The spoon was technology once; fire was technology once. When we figured out how to make them work, they disappeared in the background and became part of our everyday lives.
Technology is, by definition, the intellectual frontier. It’s taking things from science and culture that we have not figured out how to mass produce or create efficiently and figuring out how to commercialize it and make it available to everybody.
Technology will always be a great field where you can pick up specific knowledge that is valuable to society.
If you don’t have accountability, do something different
Nivi: Here’s another tweet from the cutting-room floor related to accountability: “Companies don’t know how to measure outputs, so they measure inputs instead. Work in a way that your outputs are visible and measurable. If you don’t have accountability, do something different.”
Naval: The entire structure of rewarding people comes from the agricultural and industrial ages, when inputs and outputs matched up closely. The amount of hours you put into doing something was a reliable proxy for what kind of output you’d get.
Today, it’s extremely nonlinear. One good investment decision can make a company $10 million or $100 million. One good product feature can be the difference between product-market fit and complete failure.
As a result, judgment and accountability matter much more. Often the best engineers aren’t the hardest workers. Sometimes they don’t work very hard at all, but they dependably ship that one critical product at just the right time. It’s similar to the salesperson who closes the huge deal that makes the company’s numbers for the quarter.
People need to be able to tell what role you had in the company’s success. That doesn’t mean stomping all over your team—people are extremely sensitive to others taking too much credit. You always want to be giving out credit. Smart people will know who was responsible.
Some jobs are too removed from the customer for this type of accountability. You’re just a cog in a machine.
Consulting is a good example. As a consultant, your ideas are delivered through someone else within the organization. You may not have visibility to the top people; you may be hidden behind a screen. That’s a trade-off you’re making in exchange for your independence.
You’ll develop thick-skin if you take on accountability
When you have accountability, you get a lot more credit when things go right. Of course, the downside is you get hurt a lot more when things go wrong. When you stick your neck out, you have to be willing to be blamed, sacrificed and even attacked.
If you’re the kind of person who thrives in a high-accountability environment, you’re going to end up thick-skinned over time. You’re going to get hurt a lot. People are going to attack you if you fail.
Scale your specific knowledge with apprentices
Nivi: Once you get some specific knowledge, you can scale it by training your own apprentices and outsourcing tasks to them.
Naval: For example, I made good investments and figured out the venture business. I could have kept doing that and making money. Instead, I co-founded Spearhead to train up-and-coming founders to become angels and venture investors. We give them a checkbook to start investing.
It’s an apprenticeship model. They come to us with deals they’re looking at, and we help them think it through. This model is more scalable than my personal investing.
Specific knowledge comes on the job, not in a classroom
At Spearhead we lead classes teaching founders about investing, and we also hold office hours to discuss specific deals they bring.
It turns out the classes and talks we lead are largely worthless. You can give all the generic advice people need in about an hour. After that, the advice gets so circumstantial that it essentially cancels to zero. But the office hours are incredibly useful.
This reinforces the notion that investing is one of those skills that can only be learned on the job. When you find a skill like that, you’re dealing with specific knowledge.
Another good indicator of specific knowledge is when someone can’t give a straight answer to the question: “What do you do every day?” Or you get an answer along the lines of, “Every day is different based on what’s going on.”
The thing is so complicated and dependent upon circumstances that it can’t be boiled down into a textbook form.
Nivi: The mafia figured out this apprenticeship model a long time ago. The best way to end up running one of the families was to become the driver for the Don.
Naval: Tony Soprano was a businessman who had to enforce his own contracts. That’s a very complicated business.
This transcript has been edited for clarity.
