Build wealth through leverage

I had an interesting conversation with my tennis partner this morning. He is in his early 20’s and still trying to figure out his career path. As his ultimate goal is financial freedom, I told him the concept of leverage. Two things I have learned from our conversation. First, I have a difficult time expressing my thoughts in a conversation compared to writing. Second, I thought everybody knew about building wealth through leverage. Information is definitely asymmetric – an idea that is very obvious for person X might be very new to person Y. 

One of my favorite thinkers Naval Ravikant says that in order to get rich one has to “look for professions and careers where the inputs and outputs are highly disconnected.” If I am a construction engineer who works at a construction firm 8 hours a day for 10 years, ceteris paribus, the output of my career is equal to my yearly wage (with increase) multiplied by 10. On the other hand, if I own the construction company and I have 10 engineers working for me, my output in 10 years is equal to my productivity and that of my 10 engineers. Hence, if I work for somebody, my 8 hours of daily labor has a ceiling contained by the agreed-upon-wage. But if I own the company, my 8 hours of daily labor is contained by an unlimited ceiling – depending on the amount of capital and labor working for me. 

Leverage can make input and output disconnected by a margin on how much capital and labor you utilize. If I own a restaurant, my output is the productivity of one restaurant. Whereas if I own 10 restaurants, my output is 10x or exponentially more. If financial freedom is the end goal, working 8 hours managing 10 restaurants is more productive than managing one.

Nevertheless, leverage is risky. Creating and managing a construction firm or restaurant chain involves a lot of capital and people. You have to borrow money to raise capital and you have to manage people with different personalities and levels of productivity. 

Today, in a highly connected world with the internet, software makes leveraging easier in terms of capital and people involved. Whatsapp had 50 employees (mostly engineers) and reached more than 450 million users before being bought by Facebook for $19 billion. If I had to scale a restaurant to reach 450 million people, imagine how much capital and labor that would entail. Crazy.

Leveraging capital and people, in theory, is the best way to achieve financial freedom. But it entails a lot of risks. If you’re in your 20’s and want to build wealth, find a career where you can leverage your time and money. It won’t be easy. Keep your head up.