Leverage, lollapalooza effects, a black sheep and an old boys’ club

To get rich, you need leverage. – Naval Ravikant

Leverage is the simple act of using something borrowed to amplify your gains.
(This is not the only definition of leverage, but we’ll use this idea of “borrowing” to talk about getting disproportionate gains in your life.)

I was lucky enough to get paid to learn how to use leverage to make money. First at an investment bank. Then in management consulting.

But when I started my own business, I realized that my understanding of leverage was too limited.

Borrowing capital is only the beginning.

We are familiar with ideas like borrowing money to increase your position in an investment. Like that Tesla stock ($TSLA). The hope is, you’ll make a lot more money betting big on Elon than the interest you pay to make the bet. Or taking out a mortgage for a house. If it appreciates like the Vancouver real estate market, you can flip it for a pretty profit without holding up your cashflow.

But if borrowed capital is all that you’re using, you’re missing out.

As Naval explained in his famous tweet storm “How to get rich (without getting lucky)”, you can leverage:

 

  • Capital (borrow money to increase ROI)
  • Labour (borrow people’s time and talent to get more done)
  • Media (borrow attention to build influence), and
  • Code (borrow technology to scale)

I’ve been learning and using a combination of these levers to run my business for the past three years as well.

But after many mistakes, a few successes, and a lot of reflections, I realized building wealth comes down to decision making. And to make good decisions, you have to use one hidden leverage not mentioned in Naval’s tweetstorm.

Naval says it himself, “Decision making is everything.”

You can apply all the levers. But if you don’t decide to apply them to the right ideas, in the right direction, with the right people, you won’t see the right results.

And as Naval explains,

I think people have a hard time understanding a fundamental fact of leverage. If I manage $1 billion and I’m right 10% more often than somebody else, my decision-making creates $100 million worth of value on a judgement call.

 

With modern technology and large workforces and capital, our decisions are leveraged more and more.

 

If you can be more right and more rational, you’re going to get nonlinear returns in your life.

Or put it another way:

“You only have to do a very few things right in your life so long as you don’t do too many things wrong.”

Warren Buffett

 

So how do you leverage your decisions? How do you do a few things right and not too many things wrong?

Use this underrated, less talked about, but crucial leverage for the mind:

  • Mental models (borrow codified experience and wisdom to make better decisions systematically)

Girl and the old boys’ club

When several models combine, you get lollapalooza effects; this is when two, three, or four forces all operating in the same direction. And frequently, you don’t get simple addition. It’s often like a critical mass in physics where you get a nuclear explosion if you get to a certain point of mass …

- Charlie Munger

 

Have you seen the lollapalooza effect?

Here are just some of the wildly successful legends who have created lollapalooza effects by thinking better with mental models:

  • Warren Buffett & Charlie Munger (dynamic duo at Berkshire Hathaway)
  • Elon Musk (mad genius at SpaceX, Tesla, a few other cool companies, and a secret school called Ad Astra)
  • Ray Dalio (founder of the ‘intellectual navy SEALs’, aka world’s largest hedge fund Bridgewater Associates)
  • Richard Feynman (Nobel Prize-winning physicist and polymath so brilliant that even Einstein attended his seminar, and Bill Gates called him “the best teacher I never had.”)
  • Herbert Simon (Nobel Prize-winning social scientist, polymath, forefather of behavioural economics, and father of artificial intelligence)

The list makes me feel like a girl peering into an old boys’ club.

But luckily, I stumbled into one of the few places that train you to think in models.

I found it during my last year of law school.

Urged by a friend, I decided not to go back to working for investment banks and try for management consulting.

When I was preparing for my case interviews, I wasn’t sure if I could really learn enough business strategy in a few short weeks to answer questions like:

  • Should Beyoncé release another album?
  • How to improve the profitability of the Shangri-la?
  • How should Doordash enter the Southeast Asian market?

As it turned out, I can. You can. We all can with what consultants call “frameworks”.

So what are frameworks?

They are structures for thinking. Frameworks outline cause and effect.

Take the first one I learned when preparing for case interviews:

This is the cause and effect structure of profitability.

Profit = Revenue – Cost.

So simple.

Now every time someone has a question along the lines of “How can I grow my bottom line?” You can say with confidence: “Let’s talk about how you can make more money, and/or cut your cost.”

There is nothing else to profit other than revenue and cost.

Now I can hear you say, ‘But surely companies don’t pay consultants hundreds of thousands of dollars or more for this.’

And you’re right. The trick is to have many of these frameworks up your sleeves. You have to breakdown complex situations from multiple angles to understand what the key drivers are. So that you can leverage the 80/20 principle – find the right 20% of causes to tinker with to get 80% of the desired effect.

This is essentially what mental model thinking is: systematized decision making based on cause and effect.

This way, you don’t have to react to every single situation that presents itself as if you’re facing it for the first time.

The goal is to understand reality for what it is. So that you can make better decisions quickly to produce the results you want.

That’s how management consulting firms make money. They use and create frameworks that clients don’t have. Consultants can do this because they have the unique vantage point of seeing complex business problems unfold across multiple industries over time. This gives consultants a chance to detect patterns that one company in one industry can’t necessarily see.

More importantly, new consultants can solve complex business problems from the get go because they can leverage the experience and wisdom of previous generations in the form of frameworks.

This is leverage. I borrowed codified experience and wisdom from other consultants so I could go from law grad with zero experience in strategy to consultant answering multimillion dollar questions from senior executives of public companies on what to do with their new venture. In a matter of months. Not years.

As Charlie Munger, the other half of Berkshire Hathaway’s brains, says:

You’ve got to have models in your head. And you’ve got to array your experience – both vicarious and direct – on this latticework of models. You may have noticed students who just try to remember and pound back what is remembered. Well, they fail in school and fail in life. You’ve got to hang experience on a latticework of models in your head.

So where can you find these models?

Good news, bad news, and good news

The good news: members of the old boys’ club have documented their mental models in books and on the internet (start with Farnam Street, Poor Charlie’s Almanack, Principles, and Gabriel Weinberg’s list).

The bad news: most of the information is dense. And for our time-poor generation with a goldfish attention span, some of it may even be boring. So too many people put this wondrous unfair advantage in the “too hard” pile.

But here’s the other good news: because so many people can’t be bothered to use mental models to their advantage, you have a leg up in life if you do.

Black sheep

If you are intrigued by mental models, chances are, you are an independent thinker.

Because that’s the spirit of mental models. Think different. It’s about creating your own “algorithms” to understand the world.

You can’t make money, or scientific discoveries, or paradigm shattering innovations if you thought the same as everyone else.

It’s not a difficult way of thinking. Just different.

So if you are someone who doesn’t conform, a black sheep so to speak, mental models might be what you need to tie everything together. The leverage you need to show the rest of the pack what you’re really capable of.

The question to ask

Ask yourself what you want, seek out examples of other people who got what they wanted, and try to discern the cause-and-effect patterns behind their achievements so you can apply them to help you achieve your own goals.

- Ray Dalio

Amazing minds have figured out how to think better. You just have to learn it and internalize it.

But school doesn’t teach this stuff.

So I’m compiling it for myself and my future kids. Take what’s useful for you or your kids if you want.

Like Einstein said, “Everything should be made as simple as possible, but no simpler.”

I’ll document everything on Twitter – simple illustrations of mental models, frameworks, timeless wisdom, and how people got what they wanted.

I’m thinking stuff like this: