Taking financial leverage is probably an imprudent decision, especially if it is used with the motivation of expediting your path to getting rich. Leverage can certainly be used prudently (ex. To capitalize on additional investment opportunities); it is leverage used to get rich today that should always be avoided. Leverage subverts our capacity to adopt the long-term because it pulls our attention to today. — Read more from Identity Element here or follow on Twitter
A theme that has run central to many of the pieces I have written is our perception of, and relationship with, time. Time is central to our lives. It impacts our capacity to take risk, our belief of what we can achieve and broadly affects our perception of phenomena. This piece will focus on one pursuit that is inextricably linked with time, and that is the pursuit of wealth. This read will be different from other posts as it came over the course of reading, thinking and conversing, but I hope you find it useful and as always, engaging.
Historically, large sums of wealth indicated prolonged periods of success for the individual who accumulated the sum. If one asserts that a requisite level of skill is required to accumulate wealth, then by extension, wealth used to be a central proxy for identifying talented individuals.
In the age of scale, however, the passage of time is no longer a condition for accumulating massive wealth. A talented person operating in the correct industry can compress thirty years of wealth creation into five years by incurring thirty years’ worth of stress, and expending thirty years’ worth of energy, over that five-year window. [1] This is, as Paul Graham frames it, precisely the opportunity that startups offer:
Economically, you can think of a startup as a way to compress your whole working life into a few years. Instead of working at a low intensity for forty years, you work as hard as you possibly can for four.
Startups are not magic. They don’t change the laws of wealth creation. They just represent a point at the far end of the curve. There is a conservation law at work here: If you want to make a million dollars, you have to endure a million dollars’ worth of pain. For example, one way to make a million dollars would be to work for the Post Office your whole life, and save every penny of your salary. Imagine the stress of working for the Post Office for fifty years. In a startup you compress all this stress into three or four years. You do tend to get a certain bulk discount if you buy the economy-size pain, but you can’t evade the fundamental conservation law. If starting a startup were easy, everyone would do it.
Successful startups cheat history by rewarding founders almost instantaneously. [2] However, this wealth creation mechanism need not be guaranteed; it is rare for an individual within a startup to receive the precise value he or she generates within the company. Often, startups are sold or raise funds at multiples of what they are truly worth – or they are not sold at all. So, an individual who created $1 million in value may receive a $10 million payday, or no payday at all. Such is the nature of the startup game. [3]
The beautiful thing about developing a skillset which creates wealth is that you can continue to use it. Speculation, winning the lottery, purchasing a cryptopunk, are all great ways to accumulate money, but this provides no systematic basis for accruing wealth. To do that, one must develop a skillset that society values. If you solve problems that society thinks are worth solving – at scale – wealth is likely to find you.
Programming is a beautiful way to create wealth because it contains two key characteristics – scale, and leverage. A talented engineer can incept wealth from behind a keyboard by writing code once that is used by billions of people over the world. Additionally, this form of wealth creation is levered because an engineer’s performance either solves a challenging problem or it does not – a slight decision can make the difference between massive success or complete failure. Satoshi Nakomoto is a brilliant example of this; he (or she) is an engineer that has incepted $1 trillion worth of wealth by writing ingenious code that solves a problem society deems valuable: Escaping the constraints of a fiat-based economy.
However, there are times when society develops perversions with certain industries or incorrectly values the utility of newly created wealth. These occurrences constitute bubbles, and I assert that within bubbles, there exist two opportunities for making money: Via true wealth creation, or via opportunistic cash grabs. Individuals who can see past the noise that bubbles bring are likely on their way to true wealth accumulation – they are responsible for producing a good, product or service that society currently deems valuable, and will continue to deem valuable. The assignment of that value may simply fluctuate a little. Conversely, those who are focused on money that can be obtained in a bubble cultivate a skillset that dies with the bubble. There is no staying power to be found, no avenue for future wealth creation.
Correctly navigating through noisy environments is essential on one’s quest for wealth accumulation. If one desires to get rich, developing a skillset that is not industry or opportunity specific is the best route. Investors, programmers and salesmen who cross industries and products shouldn’t be concerned on their quest – they will always have a path. Yet, it can be challenging in bubble-induced, noisy environments to find comfort in the skillset you are accruing when others are getting rich around you. Fighting this urge, and/or identifying the signal that exists within the bubble, is the best bet for getting where you want to go.
Fixating on results (getting rich) is often a recipe for disaster and is a wealth-quester’s worst enemy because it leads to suboptimal decision making. This is Goodhart’s law in action: When a measure becomes a target, it ceases to be a good measure. A wealth-quester must find solace in their pursuit of knowledge and believe that their intangible skillset will be monetized at some later date. This monetization may occur instantaneously, or it may occur steadily over the course of time. But the goal of a wealth-quester is to equip their knowledge to solve a problem at scale so that they may get rich. Benchmarking your quest for wealth against the money in your bank misses the point of the quest: Developing the skillset to repeatedly perform a valuable function at scale.
You will find additional peace in your wealth-quest if you develop a healthy relationship with time. Viewing time as abundant rather than scarce makes it easier for one to navigate roadblocks on their path to getting rich. Curating this view of time promotes a better mood and enhances decision making. If you believe that you will eventually reach where you intend to go, the focus isn’t on how to make money today, but rather, what must you do to make money tomorrow or ten years from now. The way you elect to monetize your talent is irrelevant; monetization could be compressed via a startup, obtained from a targeted investment, or steadily gained in a high-paying career (with the help of investing). In any event, a wealth-quester seeks to monetize the intangible skillset they have curated at some point while fighting the urge to get rich quick. Getting rich is a product of a well-executed wealth-quest; it isn’t something you can quest for directly.
Execution consequently becomes an instrumental piece of any successful wealth-quest. People often become so infatuated with notions of what they could accomplish, or how rosy an opportunity seems, that they lose sight of the process that is key to producing what they desire. Ambitious people aren’t concerned with the monetary rewards of executing, they are infatuated by the person they will have to become when their journey ends. This same philosophy is essential for any wealth-quester: Execution is everything.
Executing is a skill that can be developed like any other; it simply requires taking the leap. Once you have practiced enough, the knowledge accumulated by previous trials ensures that you have the capacity to execute properly when the right opportunity comes. Individuals who fail gain wisdom in this process; we learn our greatest lessons through failure. [4] It becomes essential then for a wealth-quester to adopt a long-term view due to the undoubtable existence of failure littering their path. To that end, it is important to surround yourself with others who have adopted a similar long-term perspective on their paths. This will ease your mind on your pursuit of riches.
Maintaining a good frame of mind is central to a wealth quester’s ability to execute. One cannot expect to make optimal decisions if he or she is not calibrated, especially when leverage is involved. [5] To reiterate, having an optimistic view of time helps with maintaining a balanced internal state because time dampens the affects of volatility. From an investment lens, a 50% drawdown is practically irrelevant if one’s investment horizon is twenty years; it is everything if their horizon is one week. Curating a long-term perspective provides a wealth-quester with a significant advantage relative to those who are fixated on the short term. Ignore this advantage at your own peril.
Taking financial leverage is probably an imprudent decision via the line of logic above, especially if it is used with the motivation of expediting your path to getting rich. Leverage can certainly be used prudently (ex. To capitalize on additional investment opportunities); it is leverage used to get rich today that should always be avoided. [6] Leverage subverts our capacity to adopt the long-term because it pulls our attention to today. It forces wealth-questers to monitor the noise and fluctuations involved with their day-to-day path; it robs them of perspective.
Put another way, wealth-questers seek to develop skillsets that are timeless, and society often has an infatuation with entities that are without time. [7] Society shares a pervasive affinity for beautiful architecture; is the architecture beautiful due to some innate quality, or because it has withstood the test of time? Perhaps it is a combination of both, but a wealth-quester can rest assured that they will feel immense pride in seeing their journey to completion: The quest was the destination.
Is this satisfaction derived from the journey itself, or because the journey was a success story spanning many years? There is a reason lottery winners do not derive the same satisfaction from their money as business owners who accumulated similar sums: The former’s experience is devoid of time’s passage, and consequently, devoid of any narrative structure. We are not concerned with the monetary rewards of executing, but who will we have to become by the end of our journey.
[1] From Paul Graham’s quintessential How To Make Wealth essay.
[2] This statement cheats a little – consider the following vignette. An artist paints for twenty years and finds no commercial success selling his work. Finally, he paints a masterpiece in four hours that sells for $10 million at auction. When asked how long it took him to produce the work, the artist states: “It took twenty years to make what sits in front of you over the course of four hours.” With this context, was his success overnight?
[3] I wrote a piece on this back in 2019 titled On Unknown Knowns: The Missing Quadrant. If this discussion on wealth and risk has piqued your interest – give that one a read as well.
[4] Life is our harshest teacher – it gives the test before the lesson.
[5] An athlete preparing for the biggest game of their life would probably not get drunk the night before. Unless you’re Dennis Rodman.
[6] I specifically have callable leverage in mind here. Debt that is not callable – that one can obtain because they are reasonably certain they can meet the payments for – can be equipped to compress a wealth-questers time horizon as alluded to earlier. An employee that is confident they will not be fired in three months, who will be due a $10,000 bonus, can borrow $10,000 at some rate to invest it if the investment opportunity provides a higher return than the interest they will pay on the debt.
[7] I apologize for being pedantic (and for the tautology) but I think this drives the point home. You want to be without time, time is a shackle – see past this arbitrary constraint.
This is an excellent piece.
I love the concepts regarding time that are discussed here and definitely plan to share these ideas with the older 2 of my 3 kids- both out of college and just starting their careers. Intuitively, they might get it, but the opportunity to read what someone else has written regarding what they, themselves, are thinking- provides a level of confidence that they can turn to when “things are not going well”.
I was definitely a workaholic in my 20-30’s and endured the pain of working more years than the actual number I worked. Not in a start up- just as a female in a man’s world in the 1980’s- 1990’s.
If you want to make $1M, you have to endure a $1M of pain. I really think this is a great concept that is far better to learn when you are in your 20’s than when you are, well, significantly older.
This concept applies to human relationships, as well. And I am attempting to mentally superimpose your discussion on the USA- with the object to create wealth for the country- and therefore for the people who live here.
This is a very insightful piece with much good advice. From a life devoted to teaching, learning, and sharing with others I would add a couple of observations to the wisdom in the piece. First, all of us are entrepreneurs. To succeed, or even survive, we must acquire the valuable assets of skills, gotten from work, learning from others, experience, whatever one calls it, that give one a unique perspective and a base that can be monetized and/or exchanged for needed resources. To make the most of one’s assets they must provide an edge of some kind to those who would acquire them from you. You can get a salary, sales, or other resources from those who want to acquire what you can offer. Not all the intellectual assets or skills one acquires will be valuable right away but, as the wise will tell you, they must be available when the right opportunity comes along. Today, there was an announcement of an award to two individuals who were instrumental in the rapid development of a successful COVID vaccine. The skills needed to make this breakthrough had already been acquired and the two scientists were ready to apply them when the pandemic began. Being in the right place at the right time generally isn’t an accident. Change creates needs which can often be anticipated by those sensitive to the general environment. Caring to anticipate such needs leads to skill targets that allow the individual to be prepared. Experience isn’t something one just gets sitting around waiting for something to happen. It is something one acquires purposely by seeking it. There are two strategies for making money for any company or individual. One is to produce generic outputs, like a strong back or a generic product, at the lowest cost. The other is to provide something no one else can, so one can charge a higher price than that which can be earned by lesser competitors. The first strategy dooms an individual or company to mediocre results which cannot easily be protected. The latter strategy offers protection, enhanced outcomes and the ability to accumulate wealth.
Note was also made in this piece about the importance of time. In investing, time is perhaps the greatest driver. Aesop taught us that ofttimes slow and steady wins the race. Another aspect of time is that it can be an enemy. Many firms, for example, benefit if they can bring their products to the market sooner than their competitors. That means if you are a prospective supplier to a firm, a valuable outcome you can sell is a quicker delivery of a vital part that your competitor offers. Effectively you can sell your customer the time you save them. Look at the damage currently arising from the supply chain difficulties in our economy. If, as a supplier, I could offer my product or service to a user in a way that shortens their overall time cycle, they can earn a valuable edge and are often willing to pay extra for that edge. Time is a valuable outcome and transferring that resource to a customer gives them increased freedom and a possible valuable competitive advantage. Sometimes its not the product or service one offers that is valuable, but how soon it can be delivered.