Positions of Leverage; Housing Theory of Everything; Inflation; Daniel Ek #108

Reflecting on a few interesting reads and listens over the past week

Finding a Position of Leverage 

Naval Ravikanth's writings are probably the most oft-shared quotes within the Twitter world. Nevertheless, I thought it was important to share/re-share this post on the power of building leverage

"Following your genuine intellectual curiosity is a better foundation for a career than following whatever is making money right now." 

This sounds idealistic for most folks and perhaps a path that many people intend on following but get lost along the way. 

In this post, Naval identifies three forms of leverage - labor, money, and products with no marginal cost of replication. You can think about the three classes of leverage as the three ways in which people got rich. While it’s still possible to get rich via labor and money, most people get rich (e.g. unicorn status) through the third category. 

In all three categories, there's a common element of optimizing for independence, valuing judgment, and full control over your time. The end state is best described by Naval below: 

"If you have specific knowledge, you have accountability and you have leverage; they have to pay you what you’re worth. If they pay you what you’re worth, then you can get your time back—you can be hyper-efficient. You’re not doing meetings for meetings’ sake, you’re not trying to impress other people, you’re not writing things down to make it look like you did work. All you care about is the actual work itself." 

The two skills that often support the characteristics above are when you're either building or selling (ideally both). Naval's analogy of real estate and the varying levels of leverage that people have starting from sub-contractor (paid on a per hour basis for a specific task) to developer (responsible for the entire project).

If you work in a salaried position, you can start your journey of building leverage by working your way up to try and get higher leverage, more accountability, and specific knowledge. The combination of those over a long period of time with the magic of compound interest will make you wealthy.

The Housing Theory of Everything 

Building on the benefits of building leverage, this post focuses on the challenges that come with building leverage in one specific area - housing. This post by Jeremy Driver explains the differences between people with houses vs. people without houses and how it can be linked to slow growth, climate change, poor health, financial instability, economic inequality, and falling fertility. 

I'd like to focus on some of the 'hidden effects' of housing unaffordability that Jeremy points out: 

  1. Productivity: Better jobs drive up the price of housing when it’s difficult to build more. But that works both ways: when housing is scarce in high-productivity areas, some people are priced out of the area altogether, so they can’t move within the range of better jobs. This means that many people are working in less productive jobs than they could if it was easier for them to move to more productive places.

  2. Innovation: By limiting the number of homes in high-density urban environments, we may not just be hurting productivity directly by restricting whom people can work with. We may also be missing out on the new ideas that drive society forward and that can lead to dramatic improvements in how we live.

  3. Inequality: A fixed supply of housing means improvements in people’s aggregate incomes often partially go to landowners, since people bid up the price of housing with some of their increased income. This is the case across the Western world: housing inequality, not income inequality, primarily determines how much wealth inequality there is in most Western countries.

As we think about the next 12-24 months, we're at an important stage in our journey where a few changes in policy can continue to further entrench our position around housing and its widespread impact or help reduce the vicious cycle around housing unaffordability. 

The One Thing that Matters is Inflation 

Similar to Naval Ravikant, I pay attention any time Gavin Baker, founder and  Atreides Management, posts or presents anything. In this interview, Gavin shares his perspective on how he approaches today's environment as a tech investor and how inflation can be expected to play out. Highly recommend going through the entire interview

Here are a few excerpts/points that I enjoyed.   

Approach Toward Inflation/Uncertainty

"If X happens, he’s going to go down this way, and if Y happens, he’s going down a different path. So he’s keeping an open mind and tries to imagine all the different scenarios, depending on initial conditions and whichever way the boulder starts to go."

Many of us may be aware of risk/opportunity factors but rarely go through the exercise of actually understanding the sensitivity and creating a plan for each scenario. 

Remembering the Mistakes of Our Past 

"We all have nuanced opinions on what our parents did wrong; in life, as parents or in business. Whatever it is, nobody repeats those mistakes. But all of our parents had parents, and that means that a lot of times we’re repeating the mistakes of our grandparents."

Gavin’s Outlook on Inflation

"On balance, I think that a lot of this inflation will prove to be transitory. It’s reasonably likely that you will have negative CPI prints next year. Almost certainly, there is going to be a massive supply response coming. But if it starts to go wrong, it makes life very difficult for financial markets. We have been in a secular bull market with receding interest rates for decades." 

Impact of Inflation on Tech Stocks 

"Unsurprisingly, the best thinking on inflation’s impact on the equity market comes from Warren Buffett. He basically points out that the way inflation crushes you is that it compresses RoE over time by inflating your asset base. Hence, according to Buffett, you want to own high ROIC, asset light companies with a lot of revenue and profit per employee, particularly when they have pricing power."

Podcast with Daniel Ek

This is a great podcast between Daniel Ek (CEO of Spotify) and Patrick O'Shaughnessy. They go through a wide range of topics including the challenges and opportunities in atoms-based industries like healthcare and the learnings from Spotify's expansion into podcasts and general focus on creators. 

I specifically enjoyed the way Daniel broke down the need to have a modified definition of what a minimum viable product is (e.g. think bigger), how we should think about duration (e.g. longer vs. a typical investment) and how all of this is in conflict with the way healthcare professionals are incentivized today (short-term incentives). It would be quite fascinating to see what an equity ownership equivalent would be for healthcare professionals and how that would impact the decisions they make.