The Pyramid of Leverage to Set Yourself Up for Generational Wealth
Earn with your mind, not your time.
There is an old Zen story about a king whose people had grown soft and entitled. Dissatisfied with this state of affairs, he hoped to teach them a lesson. His plan was simple: He would place a large boulder in the middle of the main road, completely blocking entry into the city. He would then hide nearby and observe their reactions.
How would they respond? Would they band together to remove it? Or would they get discouraged, quit, and return home?
With growing disappointment, the king watched as subject after subject came to this impediment and turned away. Or, at best, tried halfheartedly before giving up. Many openly complained or cursed the king or fortune or bemoaned the inconvenience, but none managed to do anything about it.
After several days, a lone peasant came along on his way into town. He did not turn away. Instead he strained and strained, trying to push it out of the way. Then an idea came to him: He scrambled into the nearby woods to find something he could use for leverage. Finally, he returned with a large branch he had crafted into a lever and deployed it to dislodge the massive rock from the road.
Beneath the rock were a purse of gold coins and a note from the king, which said:
“The obstacle in the path becomes the path. Never forget, within every obstacle is an opportunity to improve our condition.”
What if you had the ability to flip your obstacles and turn them into opportunities?
This short snippet is from The Obstacle is the Way by Ryan Holiday, who wrote about how some of the most successful people in history, from John D. Rockefeller to Ulysses S. Grant to Steve Jobs – have applied Stoicism to overcome what seems to be difficult or impossible situations.
The story you just read, there are a few key lessons in there:
Resourcefulness is crucial: The peasant’s ability to find and fashion a lever when faced with the “impossible” shows the importance of resourcefulness.
Persistence pays off: Unlike the other villagers, the peasant did not give up after initial attempts failed. This teaches us that leverage in any situation comes from the willingness to persevere where others might give up.
Opportunities often lie hidden within challenges: The hidden purse of gold coins beneath the boulder serves as a metaphor for the rewards that can come from facing and overcoming challenges.
What is leverage?
If you read till here, you probably want to know how the story relates to you building generational wealth.
First, let’s understand what leverage is. Leverage, in a broader sense, is a fundamental principle in the pursuit of wealth.
Alex Hormozi puts it this way, “Leverage is the difference between what you put in and what you get out.” Ideally, you want to get the most out of your input.
Let me paint you a scenario:
Imagine you're standing on the edge of a swimming pool. With every decision you make, you drop a pebble into the pool. The pebble represents the decisions you make. The ripples created by the pebble when it hit the surface of the water are the consequences of your decision.
When a pebble is small, the ripples you see will similarly be small.
That's when leverage comes in. Leverage fully transforms the pebble into something bigger, say a boulder. It amplifies the consequences and impacts of your decisions and judgement.
Much like the story of the peasant you read earlier, big output just by small input.
The four classes of leverage
There are four types of leverage that can be used to compound efforts and achieve greater success and scalability in business:
Labor leverage
Capital leverage
Code leverage
Media leverage
Labor leverage
Labor leverage: You have people working for you. Ideally, hire people better than you (permissioned leverage)
“If each of us hires people who are smaller than we are, we shall become a company of dwarfs. But if each of us hires people who are bigger than we are, we shall become a company of giants.” – David Ogilvy
The first form of leverage is labor leverage. Traditionally, this means you have other people working for you. It is positioned at the bottom of the pyramid as it is considered the lowest form of leverage. It requires tremendous leadership skills and it's not made for everyone. You must be able to manage a big group of people and be able to articulate your ideas, solutions, and problems well to make sure everything goes as you say.
From a financial perspective, it is difficult for you to weather an economic downturn as you'll need to pay out wages to your workers first. However, if you're able to hire excellent workers and they're able to generate excellent positive cash flow for you, this form of permissioned leverage could make you wealthy.
Capital leverage
Capital leverage: Money that you have access to (permissioned leverage)
"If you owe the bank $100 that's your problem. If you owe the bank $100 million, that's the bank's problem." – J. Paul Getty
Capital is the next class of leverage. Similar to the collaboration, this is a permissioned leverage. It is positioned above labor leverage in the leverage pyramid. The traditional finance definition of leverage is borrowed money and if you know how money works, you're able to invest in income-producing assets such as productive businesses to get a significant boost in your returns.
It also means that if the manager makes the right decision, their money will multiply. If a wrong decision is made, they lose more money. Capital is much more trickier and complex form of leverage to use. However, it's what rich people in the modern world use to generate enormous wealth with their name attached to it. Capital leverage has probably been the dominant form of leverage in the last century.
Think of Warren Buffet. He is best known for amassing his fortune through a thoughtful value investing strategy. And using capital leverage, he is able to compound his judgment and make right decisions most of the time.
If you're good at managing capital, you can manage more of it and make more of it. It can scale very, very well. And before you know it, you'll already exceeded your financial goals.
“Capital and labor are permissioned leverage. Everyone is chasing capital, but someone has to give it to you. Everyone is trying to lead, but someone has to follow you.” – Naval Ravikant, on X
Code leverage
Code leverage: Command robots to work for you (permission-less leverage)
“An army of robots is already here. It's very cheaply available… Essentially you can order this army of robots around. The commands have to be issued in a computer language, in a language that they understand…Coding is such a great superpower because now you can speak the language of the robot armies and you can tell them what to do.” – Naval Ravikant
Code, or machine leverage is a form of permissionless leverage. It works for you while you sleep and is now the leverage behind the newly rich. Think of the advent of new technologies such as blockchain. It is basically made out of complex code and it's a shared distributed ledger that stores information or data. It's the technology behind Bitcoin and Ethereum, which are applications of that technology. Think of SaaS businesses as well. Advancements in technology have democratised the ability to scale such businesses. You don’t need a huge IT infrastructure to run a scalable, deployable business.
This form of leverage is brand new—the most democratic form. It is the idea of products with no marginal cost of replication.
Code is probably the most powerful form of permissionless leverage and a great superpower because you can speak the language of robots. All you need is a computer and you don't need anyone’s permission.
Think of Google, Airbnb, Facebook, Instagram, etc. Behind these big companies, there's code that runs the whole system.
Media leverage
Media leverage: You have code and media working for you (permission-less leverage)
“The leverage and influence social media gives citizens are rapidly spreading into the business world.” – Simon Mainwaring
Likewise for content, or media leverage, it is the idea of products with no marginal cost of replication and a form of permissionless leverage. It's positioned at the same level with code.
Coding, writing books, recording podcasts, tweeting, and YouTubing—these kinds of things are permissionless. You don’t need anyone’s permission to do them, and that’s why they are very egalitarian. They’re great equalizers of leverage. Every great software developer, for example, now has an army of robots working for him at nighttime while he or she sleeps, after they’ve written the code, and it’s cranking away.
Media leverage is the content you create that is able to scale through code. For instance, the chance of your content being shown to others are based on code (the algorithm that runs the system).
Anyone with an internet connection can consume the content repeatedly through the code-based application.
If you're able to build and sell, you'll be unstoppable.
“The new generation’s fortunes are all made through code or media. Joe Rogan making $50 million to $100 million a year from his podcast. You’re going to have PewDiePie. I don’t know how much money he’s rolling in, but he’s bigger than the news. And of course, there’s Jeff Bezos, Mark Zuckerberg, Larry Page, Sergey Brin, Bill Gates, and Steve Jobs. Their wealth is all code-based leverage.” – Naval Ravikant
Forget rich versus poor, white-collar versus blue. It’s now leveraged versus un-leveraged.
How I learned about leverage
I first learned the concept of leverage from the book The Almanack of Naval Ravikant. It’s one of those books that I re-read many times (on my third now). In the book, there’s this quote that I specifically want to point out:
“The three big ones in life are wealth, health, and happiness. We pursue them in that order, but their importance is reverse.” – Naval Ravikant
Wealth, health and happiness are interconnected. We typically prioritise some of these areas at the expense of others, and this tendency shifts as we age:
When we are young, we have plenty of time and good health, but no money.
When we reach middle age, we have money and health, but no time.
When we reach retirement, we have time and money, but declining health.
What we want is to aim for all three at once:
The truth is there is no right or wrong, or at which juncture of your life you should pursue certain things. It depends on what you want to achieve and your goals – given your current circumstances.
Knowing that we won’t be on this earth for long is a constant reminder for us to make sure that everything we do fits directly in the middle of the three. And having no regrets in life is ultimately what we want.
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Thanks for reading.
See you next week,
Alvis