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How to Build Wealth

October 07, 20206 min read


When we come across a great piece of content, we often overestimate our ability to remember the key learnings.

Summarising and jotting down notes is one of the best ways to reinforce what you've read.

Below is an attempt to organise the insights I get from Naval Ravikant's How to Get Rich series, with some notes taken verbatim.

This content is available in several different format:

  1. (2 hours) Podcast - Joe Rogan Experience #1309 - Naval Ravikant. Available in any podcast platform and even YouTube
  2. (1 hour) Long transcript - recommended
  3. (10 minutes) Tweet storm

Key learnings

There are different types of wealth, and the one Naval is focusing on here is financial wealth. His definition of wealth is oriented toward businesses and assets that can earn while you sleep.

Table of Content:

  1. Theory of wealth
  2. You must own equity to gain your financial freedom
  3. Making money isn’t about luck
  4. the Internet has massively broadened the paths to wealth creation
  5. Play long-term games with long-term people
  6. Rational Optimist
  7. as an employee, act like an owner
  8. It takes just as much effort to create a small business as a large one
  9. Wealth stacks up one chip at a time

1) Theory of wealth

Money is how we transfer wealth. Money is essentially social credits - it is 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.”

The purpose of wealth is freedom -  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.

...

Money is not evil. When we are creating wealth, we are creating abundance to the world, and not taking away or stealing money from somebody else.

Most of the wealth in civilization, in fact all of it, has been created. It was created from somewhere - from people, from technology, from productivity, from hard work and ingenuity. That is how a regular person now can enjoy a higher standard of living than the king of France 300 years ago.

2) You must own equity to gain your financial freedom

Renting out your time and expertise means your outputs are very closely tied to your inputs. 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.

If we look at even doctors who get rich, like really rich, it’s because they open a business e.g. 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.

For famous celebrities and top athletes, they might be high earners when they are at the top of their games. But the ones that get very wealthy are those who reinvent and build businesses:

  • Dre made much more from Beats headphones than from music
  • Jordan made much more from Nike than from playing basketball
  • Clooney made much more from selling Tequila than from acting
  • George Lucas made his fortune from his production company rather than directing
  • Jessica Alba (Honest Company)
  • Kanye West (Yeezy)
  • Ryan Reynolds
  • Oprah

Even the earnings of Jennifer Aniston in Friends - $1 million per episode - dwarfs compared to the $100 millions Robert Downey Jr. got from 8% profit share for all Iron Man movies.

...

To get wealthy, you need to earn non-linearly, meaning your outputs cannot be coupled with your inputs.

And the way to do that, is to own equity and business. Own a product that can be produced with little marginal cost. Own a brand that compounds over time.

You won't be wealthy if you are just renting out time.

3) Making money isn’t about luck

There are four kinds of luck:

1 - Blind luck

2 - Luck from hustling

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.

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 also one that differentiates you the most. Which is where you build a unique character, a unique brand, a unique mindset, where then luck finds you.

Make Luck your Destiny

Build your character in a way that luck becomes deterministic, in a way that opportunities find you.

In 100 parallel universe, you want to be wealthy in 99 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.

And to do that, you need to create your own luck, and 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.

4) the Internet has massively broadened the paths to wealth creation

To create fortune, you need leverage.

In the past couple hundred years, Labor and Capital are the most important leverage. In the previous generation, fortunes were made by capital. That was the Warren Buffets of the world.

But the new generation’s fortunes are all made through product or media - the new form of leverage. Joe Rogan making 50 to a 100 million bucks a year from his podcast. Streamers and Youtubers like PewDiePie are bigger than the news.

And the dominating corporations now - tech giants - built their fortunes not with traditional labor and capital leverage, but with product and software leverage.

The most interesting thing about the new forms of leverage is they are permissionless. They don’t require somebody else’s permission for you to use them or succeed.

For labor leverage, somebody has to decide to follow you. For capital leverage, somebody has to give you money to invest or to turn into a product.

Coding, writing books, recording podcasts, YouTubing - these are permissionless. You don’t need anyone’s permission to do them, and that’s why they are very egalitarian. They’re great equalizers of leverage.

...

At its core, creating wealth is giving society what it wants, but doesn’t know how to get — at scale.

The beauty of the Internet is it allows you to scale any niche obsession.

If you just want to reach 50,000 passionate people like you, there’s an audience out there for you out of billions of Internet users.

Back then, if you were living in a little fishing village in Italy, and if your fishing village didn’t necessarily need your completely unique skill, you had to conform to just the few jobs that were available. But now today you can be completely unique.

5) Play long-term games with long-term people

Essentially, all the benefits in life come from compound interests. Whether it’s in relationships, or making money, or in learning.

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, to reap the returns of a compound interests.

To do that, it is better to have a few compounding relationships than many shallow ones.

6) Rational Optimist

Don’t partner with cynics and pessimists, because their beliefs are self-fulfilling.

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.

strong action bias

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.

We’re descended from pessimists, in the jungle days. the pessimist runs and survives, and the optimist gets eaten. But the reward/risk ratio is a lot different in modern society.

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.

7) as an employee, act like an owner

There is a classic Principal-Agent problem for employer and employee. A principal’s incentives are different from an agent’s incentives.

If you’re an employee, your most important job is to think like a principal and develop a founder mentality.

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.

Ideally you want to be in a role where you have direct accountability, direct impact to the company's success. If you don’t, do something different or find a different company.

8) It takes just as much effort to create a small business as a large one

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.

9) Wealth stacks up one chip at a time, not all at once

Just as our money in investment account compounds over time, our efforts and habit in building wealth is one that takes time and deliberate effort to build up. More options, more businesses, more investments, more things that you can do.

It is going to be a long lifetime of learning, of reading, of creating that’s going to compound.

A good philosophy is impatience with actions, patience with results.



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