Judgment Is the Decisive Skill

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Everything we’ve discussed so far has been setting you up to apply judgment.

Transcript

In an age of infinite leverage, judgment becomes the most important skill

Nivi:  We spoke about specific knowledge, we talked about accountability, we talked about leverage. The last skill that Naval talks about in his tweetstorm is judgment, where he says, that “Leverage is a force multiplier for your judgment.”

Naval: We are now living in an age of nearly infinite leverage, and all the great fortunes are created through leverage. Your first job is to go and obtain leverage, and you can obtain leverage through permission by getting people to work for you, or by raising capital.

Or you can get leverage permissionlessly by learning how to code or becoming good communicator and podcasting, broadcasting, creating videos, writing, etc.

That’s how you get leverage, but once you have leverage, what do you do with it? Well, the first part of your career’s spent hustling to get leverage. Once you have the leverage, then you wanna slow down a bit, because your judgment really matters.

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Example: From Laborer to Entrepreneur

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The continuum from laborer to real estate tech company goes from low to high specific knowledge, accountability and leverage.

Transcript

Laborers get paid hourly and have low accountability

Naval: The tweetstorm is very abstract. It’s deliberately meant to be broadly applicable to all kinds of different domains and disciplines and time periods and places. But sometimes it’s hard to work without a concrete example. So let’s go concrete for a minute.

Look at the real estate business. You could start at the bottom, let’s say you’re a day laborer. You come in, you fix people’s houses. Someone orders you around, tells you, “Break that piece of rock. Sand that piece of wood. Put that thing over there.”

There’s just all these menial jobs that go on, on a construction site. If you’re working one of those jobs, unless you’re a skilled trade, say, a carpenter or electrician, you don’t really have specific knowledge.

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Pick a Business Model With Leverage

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Ideally, you should pick a business model with network effects, low marginal costs and scale economies.

Transcript

Scale economies: the more you produce, the cheaper it gets

Nivi: One more question about leverage. Do you think a choice of business model or a choice of product can also bring a kind of leverage to it?

For example, pursuing a business that has network effects. Pursuing a business that has brand effects. Or other choices of business model that people could manipulate that just give you free leverage.

Naval: Yeah, there’s some really good microeconomic concepts that are important to understand.

One of those is scale economies, which is the more you produce of something the cheaper it gets to make it. That’s something that a lot of businesses have, Basic Economics 101.

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Product Leverage is Egalitarian

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Labor and capital are limited to the people who control those resources. But products reach global markets.

Transcript

Product leverage is a positive sum game

Naval: Labor and capital are much less egalitarian, not just in the inputs, but in their outputs.

Let’s say that I need something that humans have to provide like if I want a massage or if I need someone to cook my food. The more of a human element there is in providing that service, the less egalitarian it is. Jeff Bezos probably has much better vacations than most of us because he has lots of humans running around doing whatever he needs to do.

If you look at the output of code and media, Jeff Bezos doesn’t get to watch better movies and TV than we do. Jeff Bezos doesn’t get to even have better computing experience. Google doesn’t give him some premium, special Google account where his searches are better.

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Product and Media are New Leverage

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Product and media are the leverage of new wealth. Create software and media that work for you while you sleep.

Transcript

Product and media are the new leverage

Naval: The most interesting and the most important form of leverage is this idea of products that have no marginal cost of replication. This is the new form of leverage.

This was only invented in the last few hundred years. It got started with the printing press. It accelerated with broadcast media, and now it’s really blown up with the Internet and with coding.

Now, you can multiply your efforts without having to involve other humans and without needing money from other humans.

This podcast is a form of leverage. Long ago, I would have had to sit in a lecture hall and lecture each of you personally. I would have maybe reached a few hundred people and that would have been that.

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Labor and Capital Are Old Leverage

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Wealth requires leverage. Labor and capital are older forms of leverage that everyone is fighting over.

Transcript

Our brains aren’t evolved to comprehend new forms of leverage

Nivi: Why don’t we talk a little bit about leverage?

The first tweet in the storm was a famous quote from Archimedes, which was, “Give me a lever long enough and a place to stand and I will move the Earth.”

The next tweet was, “Fortunes require leverage. Business leverage comes from capital, people and products with no marginal costs of replication.”

Naval: Leverage is critical. The reason I stuck in Archimedes quote in there is… normally I don’t like putting other people’s quotes in my Twitter. That doesn’t add any value. You can go look up those people’s quotes. But this quote I had to put in there because it’s just so fundamental. I read it when I was very, very young and it had a huge impression on me.

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Take Accountability to Earn Equity

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If you have high accountability, you’re less replaceable and you can get a piece of the business.

Transcript

Accountability is how you’re going to get equity

Naval: Accountability is important because that’s how you’re going to get leverage. That’s how you’re going to get credibility. It’s also how you’re going to get equity. You’re going to get a piece of the business.

When you’re negotiating with other people, ultimately if someone else is making a decision about how to compensate you, that decision will be based on how replaceable you are. If you have high accountability, that makes you less replaceable. Then they have to give you equity, which is a piece of the upside.

Taking accountability is like taking equity in all your work

Equity itself is a good example because equity is also a risk-based instrument. Equity means you get paid everything after all the people who need guaranteed money are paid back.

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Embrace Accountability to Get Leverage

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Embrace accountability. Society will reward you with leverage.

Transcript

You have to have 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.

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There’s No Actual Skill Called “Business”

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There’s no actual skill called business. Avoid business schools and magazines.

Transcript

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. 

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The Foundations Are Math and Logic

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If you understand mathematics and logic, you have the basis for understanding everything else.

Transcript

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.

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