If your only way of making money is selling your time (eg as a professional) there are a number of reasons why you will be unlikely to build wealth.
The Problem of Being Good At Your Work
Selling your time has limits to creating wealth: there is only 1 of you (so the hours per year you can sell is limited); while some professions pay extremely well (eg a QC) most don’t (eg teaching, GP, engineer, chemist); and salaried wages are generally taxed the highest in most countries (and most professionals simply get paid a salary); and most salaried professionals are kept busy enough in their work that they don’t have any spare energy for other things (even “side hustles”) and most employers contractually discourage ‘other things’.
To generate wealth you need to have an interest in a business other than selling your time by the hour. That is, you need to own part or entire businesses. Which for most people in the past 40 years has meant owning shares via the stockmarket or real estate of some form. Both of these asset classes have in that time benefited greatly from global decline in interest rates. However, with real estate having rebounded and equity markets at record highs (and with interest rates and zero or negative rates) it is hard to see that these simply/simplistic investment strategies will be such long hanging fruit.
So if the professional is limited in their lifetime earning potential, and limited in finding ‘easy’ investments - what are you to do?
Invest in leverage opportunities. What?
What Is Leverage?
Lets step back and ask why some business owners don’t seem to make much money (eg the local hipster barber) and some business owners make a squillion (eg Bill Gates). The difference is leverage. Leverage is the simple idea that the outputs (eg building wealth) are impacted disproportionately by the inputs (eg your time and money).
[There are two other main ways to be wealthy: to be born that way; or to be lucky. The former happens if your dad is an oil Barron; the later happens if you are an oil Barron].
Historically there have been two main types of leverage: 1. People leverage; 2. Financial leverage.
People leverage happens for partners of law firms. The reason the partner makes more money is because she charges out the juniors at more than they are paid. The partner’s time because leveraged through the time of the junior staff.
Financial leverage is the reason people have always been drawn to Wall Street. If you manage money for other people you might charge them 1% per year to provide that service. But it is probably about the same amount of work for you whether you are managing $1,000 or $10,000,000. That is financial leverage.
As Naval has pointed out, the internet has provided a new form of leverage: code and media. It takes roughly the same mount of work to make one Facebook app whether 10 people use it or whether 1 million people use it. This is the leverage of code (the leverage comes because it doesn’t cost very much more to distribute that code to 10 or 10 million people ie zero incremental production cost). Or you make a podcast episode which takes 10 hours to make whether the only listener is your mum, or the entire population of Madrid. That’s media leverage in the golden age of the internet.
Code and Media Leverage
The internet is still young, but its effects have been immense and only just getting started.
The internet has poured fuel on the fire lit by the leverage of code and media. The first reason is distribution of code that is basically zero cost (not quite but pretty close). This means that the incremental cost of more sales is also almost zero. In the 1980s when Microsoft started shipping Office software it came of 60 floppy disks in a large box with long printed manual. This not only brought down Microsoft’s margin on each sale, it actually required cash to sell more product (because each new box probably cost $200 to produce which would then sit on the store shelf until the salesman made a sale). When Canva started selling design software, each new subscriber has limited incremental cost enabling much faster growth - and very high margin (ie profitable) growth.
The fuel the internet lit for leverage was not just free distribution of software code - it also added delivery of global niche audiences. If in the 1980s you were interested in sharing your travel adventures with an audience you were limited to forcing close relatives to sit through your 400 slide show of Portugal in July. Perhaps you could have written a book, but the chances of any publishing house picking you up would have been next to zero.
Not so today.
There are many travel bloggers who make a good living sharing their ‘slide shows’ to a global audience. Anyone travelling to Portugal this year can discover your blog post and learn from your experiences. This niche audience (people-travalling-to-Portugal-this-year) can be discovered; and they can discover you. And that audience may be very few people in any given city of the world; but together they add up to something significant for your blog traffic - that is leverage.
Code And Media Leverage Is Big, But Cheap
Today, the cost of taking advantage of the That Leverage (internet fuelled code and media driven leverage) has collapsed. The cost to start a podcast has collapsed, but so has the difficulty. It’s just easier than it was once.
So to get started you need much less capital than you once did. In fact, most startups begin with just the late night coding and ramen noodles of a few adventurous students (or college drop outs if you believe the folklore).
If leverage is the way to generate wealth there has never been a better time than now to take advantage of the That Leverage - but you probably feel you can’t.
Leverage Is Passing Me By
High School dances are awkward affairs at best; but being the only person not dancing is the worst. Everyone seems to be having so much fun but you can’t join in on the action!
And that is how you might feel about the That Leverage if you are a working professional. It seems so attractive, but you feel so stuck. The logic makes sense, but the opportunity is passing you by.
You’re not alone.
Life is busy. Work is busy. Family is busy. You have a mortgage. Kids school fees. Car payments. Health insurance. Orthodontist bills. The ski trip.
The life of the professional is all consuming and can often be overwhelming. Even if you wanted to take advantage of the Third Leverage you most likely can’t or wouldn’t. How would the boss feel about your twitter posts for your new podcast? How can you share what you know with the world when the company pays you not to share what you know with competitors? Perhaps when you retire (or when you are made redundant) you will have some head space and energy to think about these things.
What would it take to take advantage of That Leverage without quitting your job tomorrow?
- Be informed: understand the possibilities of That Leverage
- Start small: even a side hobby that has That Leverage potential can start small (and yet end as something significant)
- Work out how to apply That Leverage to your company in your professional role and use that as learning
- Don’t over-estimate how much progress you could make in the next 12 months, but don’t under-estimate the progress you could make in the next 5 years
- Find That Leverage partners: maybe you have some cash and your friend has time and skills; together you could build a business that takes advantage of Third Leverage