How to Get Rich Without Getting Lucky (Naval Ravikant)

So what if I told you there was an instruction manual on how to get rich in today's economy? Would you want to know what that instruction manual consisted of? Believe it or not, this actually exists, and we're going to go through it all in today's video. This instruction manual on how to get rich comes in the form of a Twitter thread by highly respected venture capitalist Naval Ravikant.

This thread is cleverly titled "How to Get Rich (without getting lucky)." For background, Naval Ravikant is one of the most well-known venture capitalists in the world and has become a legend in the tech investing space of Silicon Valley. He was an early investor in Uber and Twitter and has founded multiple tech companies. As a result, he is incredibly wealthy.

Now normally, my videos focus on studying investors that invest in publicly traded stocks, such as Warren Buffett and Charlie Munger. However, I felt like I had to make this video because I know the information you're about to learn is honestly going to change the way you think about getting rich. If you are looking for a how-to guide on how to get rich, here it is! You're in for a treat. Now let's get into the video.

So a lot of people have a perception that rich people just got lucky. There is this perception that rich people just stumbled into starting some company that turned out to be extremely successful, or they inherited their money. Now, don't get me wrong; there are definitely those stories out there, but that is far from the majority. The data actually shows that anywhere from 80 to 90 percent of millionaires are self-made.

So this raises the question I want to answer in this video: how do they do it, and how can we replicate it? Fortunately for us, Naval put together this guide on how to get rich without getting lucky. He wanted to establish a set of principles that an individual could follow that would give them a 99.9% chance of getting rich. He wanted to take luck out of the equation.

Here are the principles that really stood out to me, and I think could completely change the way you think about getting rich. Let's jump into the thread with the first tweet:

"Seek wealth, not money or status."

While this might seem obvious, Naval explains that wealth is having assets that earn while you sleep. Money is how we transfer time, and wealth status is your place in the social hierarchy. While pretty much everyone says they want to get rich, what they are really after is status.

The majority of people are chasing money or status when instead, they should be focusing on chasing wealth. Think about it: most people work really hard their whole life to get a fancy job with a fancy title. I would say most of them are pursuing the money and status that comes with that job. As their salary grows and as they climb the corporate ladder, most people upgrade their lifestyle significantly—new cars, fancy luxury apartments, glamorous vacations during the one week a year they get off from work.

Despite making a lot of money, they aren't rich because they're using their money to purchase status instead of assets—the status in society that comes with having a nice car or a penthouse apartment in a big city. This is why 36% of people in America that make over two hundred and fifty thousand dollars a year are still living paycheck to paycheck.

Instead, Naval says if you want to get rich, you have to seek wealth. He defines wealth as having assets that earn while you sleep. These assets are things like real estate, stocks, or businesses that you own. In order to get rich, you have to change your definition of "rich." A rich person isn't someone who has a fancy apartment or drives a sports car; a truly rich person is someone who instead owns assets that produce cash for them while they sleep.

And you don't have to be a multi-millionaire to begin purchasing these types of assets. These assets don't have to be a huge apartment complex or a 100-million-dollar company. You can start by purchasing a modestly priced rental property, for example, or a small business such as a laundromat or car wash.

This leads perfectly into Naval's next principle:

"You're not going to get rich renting out your time. You must own equity, a piece of a business, to gain your financial freedom."

Think of the city you live in. Who do you think the richest people are in your city? It is the people that own successful businesses. It's not the lawyer or the doctor unless they own their own practice. It's not the highly paid salespeople or the software engineers; it's the people that own businesses that those highly paid employees work at.

Believe it or not, one of the wealthiest people in my hometown was the person that owned all of the McDonald's franchises throughout the city and the surrounding area. He owns something like 15 McDonald's locations, and he was far richer than any of the doctors or lawyers in the city.

It's impossible to get truly rich just by renting out your time. Even if you are getting paid $200 an hour, how much money you make is going to be limited purely by the number of hours in a day. In order to get rich, you have to move on from being an employee to being a business owner.

Now, this doesn't mean you have to go out and start your own business. What it does mean is that you have to find a way to get equity in a business. The most common way to get meaningful equity in a business is to receive equity as part of your compensation. This is how even relatively junior-level employees can build significant amounts of wealth.

Let's say you work for a fast-growing startup for a number of years. Even if you leave for another job, you get to keep the equity in the company you earned while working there. This equity is working for you while you sleep, even though you are working someplace else. Now you are still a part owner of the business that you received equity in. This means that you're entitled to a portion of that company's profits, and as the business grows, so does the value of the stock you own.

The next tweet is:

"You will get rich by giving society what it wants but does not yet know how to get at scale."

The key word here is "at scale," meaning that you will get rich if you create a valuable product or service for society and find a way to distribute that product to tens of thousands, hundreds of thousands, millions, or even billions of people.

Look at some of the richest people in the world. Elon Musk is selling Teslas to millions of people, with ambitions for that number to go way higher. Then there's Bill Gates and Microsoft. Microsoft's products have been used by hundreds of millions of people and are a daily part of many people's lives. Larry Page and Sergey Brin founded Google, a search engine used by billions of people.

Notice how all of these super rich people were able to give society what it wanted but did not yet know how to get. And they're able to do it at an absolutely massive scale. The "at scale" part is the true differentiator. It's why the founder of Walmart became a mega billionaire, and the owner of the local grocery store is not.

As you are able to provide more people with your product or service, your wealth increases in proportion. Next, we have:

"Pick an industry where you can play long-term games with long-term people."

If you have watched any of my other videos, you know that I'm a huge fan of compound interest. This is the concept of investing that explains how wealth building acts like a snowball rolling down a hill. It starts out small but gets large quickly once it starts to pick up snow.

Compound interest also applies to relationships within the industry you work. Take a real estate agent, for example, that has been an agent for 20 years and has been doing great work. He would have relationships with the other great agents in the city. He would know what contractors are the best to work with and what banks give the best financing terms for his clients.

This realtor has built long-term relationships with long-term people. The realtor knows that the contractors aren't going to screw over his clients because they've been doing deals together for years and will keep doing deals together in the future. If someone is looking for a real estate agent, this real estate agent is not going to have any trouble getting new clients. His business will be extremely successful and will print cash.

This is an example of compound interest when it comes to business relationships and why it is important to play long-term games with long-term people. It's important to note that not every industry allows you the luxury of being able to play long-term games with long-term people.

In order for this to be the case, the industry has to be growing or at least remaining steady. Imagine you were to join the traditional physical newspaper business. This is an industry that is in structural decline. You aren't able to play long-term games with long-term people in industries that are in structural decline, and this is purely due to the fact that the industry may not even be around 10 or 20 years from now.

As a result, you aren't able to benefit from compounding relationships in that industry. These next set of principles from Naval are my personal favorites and are probably the ones that have been getting the most attention from people:

"Arm yourself with specific knowledge, accountability, and leverage."

According to Naval, there are three things you need to have in order to get rich: specific knowledge, accountability, and leverage. This is how he defines specific knowledge: specific knowledge is knowledge that you cannot be trained for. Specific knowledge is found by pursuing your genuine curiosity and passion rather than whatever is hot right now.

Building specific knowledge will feel like play to you but will look like work to others. When specific knowledge is taught, it's through apprenticeships, not schools. Specific knowledge is often highly technical or creative. It cannot be outsourced or automated. The whole point of building this specific knowledge that Naval refers to is to make it so that what you do for your company cannot be easily replaced.

A perfect example of specific knowledge would be Warren Buffett and his job as CEO of Berkshire Hathaway. There's nobody that has Buffett's specific knowledge. He is the master of investing, capital allocation, and managing the CEOs of his various subsidiaries. Part of the perceived risk involved in investing in Berkshire stock is that once Warren Buffett stops being CEO, whoever replaces him won't have nearly as much specific knowledge as Buffett, and the business won't be as successful.

Now, Warren Buffett is an extreme example of specific knowledge, but another way to think about specific knowledge is a rare combination of seemingly random skills and knowledge that not a ton of people possess. This YouTube channel is a small example of that.

Picture three overlapping circles arranged in a Venn diagram. Now I have knowledge of investing because that's what I do for a living. I spent thousands of hours learning and practicing the craft of investing in a professional setting. I also really enjoy video editing and animation, which has become a bit of a hobby of mine. In addition, teaching people new things has also been something that has come naturally to me. I actually have considered becoming a college professor one day.

The number of people that possess any one of these skills is high; however, very few people possess all three of these skills at the exact same time. I think this YouTube channel has been getting some traction because I have specific knowledge that sits at the intersection of these three seemingly unrelated skills.

Just as a quick side note, I just wanted to say that I really appreciate all the love you guys have been showing the channel. If you aren't already, make sure to subscribe to the investor center because our community is over 160,000 people strong, and it would be even better with you in it.

The next requirement to becoming rich is what Naval refers to as accountability. Here's what he had to say about it:

"Embrace accountability and take business risks under your own name. Society will reward you with responsibility, equity, and leverage."

The most accountable people have singular public and risky brands: Oprah, Trump, Kanye, Elon. This concept of accountability from Naval speaks to the power of having a so-called personal brand. Use Elon Musk for example. Let's say you magically took away all of his businesses and all of his money. The only thing left would be his name and reputation.

I guarantee that within just a matter of weeks, he would again be a billionaire. He has embraced accountability and has built his businesses and career in the public eye. As a result, wealthy investors would literally throw him billions of dollars and beg him to go out and build another company.

Now, obviously, this is an extreme example, and there's not many people that have Elon's type of brand, but this concept of accountability can still be applied on a smaller scale. Imagine a car dealership in your hometown. Let's just say this car dealership is owned by a guy named John Smith. He plasters his name all over the building: John Smith Car Dealership.

Let's just say this guy provides great service to his customers and never rips anyone off. He acts with transparency and honesty in an industry that has plenty of people that don't. As a result, everyone in that town would want to go to him to purchase a car. Even if a natural disaster came and destroyed his entire business and bankrupted him, it wouldn't be long until he is back in business and successful.

This is because John Smith has built a reputation as an honest and fair person to purchase a car from. This is the benefit of "embracing accountability," as Naval puts it.

So now we know getting rich requires specific knowledge and accountability. This brings us to the third requirement: leverage. Now, when most people think of leverage, they think of debt. That is a form of financial leverage, but Naval defines leverage differently. This is how he defines it: fortunes require leverage.

Business leverage comes from capital, people, and products with no marginal cost of replication—code and media. Let me explain what I mean using a simple equation: input times leverage equals your output. The input is the amount of time and effort you put into doing an activity. This is usually measured in hours. The output is how much value is created, usually measured in money.

The leverage variable is what determines how much output is created by the amount of input. Now, don't get caught up in the exact numbers of the equation; instead, focus on how the leverage variable impacts this theoretical equation.

Let's say we have two people, Jack and Jill, and let's say both Jack and Jill put in eight hours of work a day. That is the input in this equation. Let's say Jack is working in a low-leverage activity. Let's say the leverage factor is five; that means Jack's eight hours of work (the input) has created 40 units of value (the output).

But on the other hand, let's say Jill is working in a super high-leverage activity. Let's say her leverage factor is 500. This means her eight hours of input created 4,000 units of value. Now, don't get too concerned with the exact numbers; these numbers are purely for illustrative purposes. What is important to understand is the concept of how not all activities are created equal from a leveraged perspective.

You want to be working in high-leverage activities if you want to get rich. Most people think that if you want to get rich, you need to work more. However, what most people miss is that this is just one part of the equation. The amount of leverage in your given activity can matter way more than how much work you put in.

This is why a laborer at a construction company and the construction company owner can both work the same hours, but the owner of the company produces way more output in the form of wealth. That is because the owner of the company is engaged in a higher-leverage activity. This concept of leverage isn't just for entrepreneurs—it's also super important for people who are employees to understand the concept of leverage.

We will get into this more soon, but as an employee, you want to get closer to points of leverage within the business you work. The closer you are to the high-leverage activities within a company, the more money you can make. According to Naval, there are four different types of leverage: capital, labor, media, and code.

Here's how we went on to define each form of leverage: capital means money. To raise money, apply your specific knowledge with accountability and show results in good judgment. Labor means people working for you. It's the oldest and most fought over form of leverage. Labor leverage will impress your parents, but don't waste your life chasing it.

Capital and labor are permission leverage. Everyone is chasing capital, but someone has to give it to you. Everyone is trying to lead, but someone has to follow. Code and media are permissionless leverage. They're the leverage behind the newly rich. You can create software and media that works for you while you sleep.

Think of the four different types of leverage as a pyramid. At the bottom of the pyramid, we have labor. Labor is the least efficient type of leverage. Anyone who has to manage people knows how difficult it is. You always have to train new people as employees quit or move jobs.

The next step up on the pyramid is capital. This is a powerful form of leverage and is how the richest people of the 20th century made their money. Warren Buffett is actually a perfect example of this. Buffett really started to make a name for himself when he started the Buffett partnership.

The Buffett partnership was an investment fund that most closely resembles what today would be called a hedge fund. The fund Buffett agreed to invest money on behalf of wealthy people in his hometown in exchange for a share of the profits. This is a perfect example of leverage at work.

Let's say Buffett had a hundred thousand dollars of his own money to invest, and let's also say he agreed to manage three million dollars for wealthy people in exchange for one-third of the profits. Buffett, being the great investor that he is, generates a 30% return on the combined pool of money. That means he would have generated thirty thousand dollars in profits on his own money.

The three million dollars he is managing for his investors would have generated nine hundred thousand dollars in investment profits. If Buffett's cut is one-third of that, that means he made three hundred thousand dollars for himself for managing other people's money. So in total, Buffett made three hundred and thirty thousand dollars—the thirty thousand in profit he made from his own money plus the three hundred thousand in profit he made from the return he generated for investors.

This is a perfect example of using capital as a form of leverage. Buffett was able to make 11 times the money than if he was just investing his own money. However, notice that he didn't have to do 11 times the work—in fact, he probably didn't have to do any more work than if he was just investing his own money. This is the beauty of doing high-leverage activities.

Labor and capital are powerful forms of leverage; however, they do have one big drawback—they're what Naval refers to as permission forms of leverage. This just means in order to use these forms of leverage, you have to convince someone else either to work for you or to give you money. This fact makes accessing these forms of leverage more difficult, and that's why they're on the bottom of the pyramid.

Above labor and capital, on the pyramid of leverage, we have media and then code. These have the huge benefit of being permissionless forms of leverage. Media is things like podcasts, books, blogs, Instagram posts, and even videos here on YouTube.

Take YouTube videos as an example: your favorite YouTube creator spends hours crafting a great video. They do the hard work of crafting that video one time, and that video can earn them money for years. Just think of how many videos you watch on YouTube that were posted months or even years ago.

At the top of the pyramid, we have code. Code is referring to computer programming and the creation of software. This is what has created the largest companies of the 21st century—Apple, Google, Microsoft, the list goes on and on. Just like media, you can create software that works for you while you sleep.

Covenant software is the ultimate form of leverage. It allows companies of just a few hundred people to be worth hundreds of millions of dollars. And here's a crazy stat for you: Walmart and Facebook are both valued at 350 billion dollars. Walmart has 2.3 million employees; Facebook has less than 50,000. Facebook has been able to create a company that is just as valuable as Walmart with just 2% of the number of employees. This shows the power of code as a form of leverage.

Now that we understand the importance of leverage and its different forms, it changes the way we think about work and getting rich. As we wrap up this video, I want to end it with this tweet:

"Apply specific knowledge with leverage, and eventually you will get what you deserve."

These concepts take time to play out. This isn't a get-rich-quick scheme. Instead, the various concepts we talked about in this video are a set of principles that will help get you rich, but it won't be instantaneous. Just like anything worthwhile, it will take time.

As always, thank you for watching! Make sure to subscribe to the channel because it's my goal to make you a better investor by studying the world's greatest investors. If you enjoyed this video, make sure to check out this other video on the channel because it's full of knowledge that I'm sure you'll find valuable. Talk to you again soon!