Leverage

Over the weekend I read the Almanack of Naval Ravikant. Naval is an investor and entrepreneur and the founder of AngelList. The book gives his unique perspective on building wealth and enjoying life.

I flew through this book. I literally couldn’t put it down. The part I enjoyed the most was his perspective on leverage. He believes that leverage is the thing that leads to wealth. You can get leverage from people working for you. You can get leverage from investing your money. But the highest form of leverage — the new form of leverage — is to spend time selling or building products with no marginal cost of replication. This is easy to do in the digital age. You can write some code that can create infinite value, well beyond the time you put into writing the code. You can create a podcast that millions of people can listen to. These are things where the output is disconnected from the input. This blog post is a form of this leverage. It only took me a few minutes to write, but it can be read by millions of people for years to come.

As Naval points out in the book:

A general contractor has more leverage than the person that repairs the house.

A real estate developer has more leverage than the general contractor.

A money manager of a real estate investment fund has more leverage than the real estate developer.

Zillow has more leverage than all of them.

You see that as you climb the ladder, the value created gets more and more disconnected from the input. Zillow, in addition to having labor-based leverage (employees) and money-based leverage (venture capital), also has code-based leverage (leverage that can scale infinitely with near-zero marginal cost). Whereas the person repairing the house has none of that. That person is paid an hourly wage that is tied perfectly to the amount of time he or she puts in.

I really like this way of thinking about modern-day wealth creation. Spend your time on high leverage activities and projects, particularly those that are digitally-oriented. This is one thing I think people miss when they point to tech stocks being overvalued. These companies can get really big really quickly. That can be hard to wrap your head around.

The full excerpt on leverage can be found here. I highly recommend giving it a read.