In high school Physics, we all studied levers. A lever is a simple machine that helps in amplifying the force. For example, if I apply 1 unit of force at a distance of 1 m on one side from center, the lever amplifies it to say 5 units of force at a distance of 5 m on the other side of the center. If I apply 2 units of force, it gets amplified to 10 units. And so on. But, if I apply no input, there is no output. This is an example of linear relationship between input and output. It is also an example of a system where the output is dependent on the input.

Many years ago I was gainfully employed in an IT Services company. For all the years that I worked, I received a timely monthly salary. But when I quit working, the salary also stopped. So clearly, there was a linear-like relationship between the output (my income) and the input (my effort and my time). Input led to output; no input led to no output.

A few years back, a friend and I wanted to buy a co-working space business. It seemed like a good idea until my friend explained it to me: look we break-even at 75 seats and we have an upper limit of 120 seats. So no matter, how hard we work, we wont make a lot of money here. In hindsight, by not buying the business we had dodged a bullet. Why? Because the revenue model of a co-working space is linear in nature (more seats = more revenues and less seats = less revenues). And the upside is capped too as there were only 120 seats to fill. (In addition to non-linearity you want systems that preferably have an unlimited upside with little or no downside.)

So, the lesson I learnt from the above is to get ahead in life, I should avoid systems with linear relationships between output and time. So I should either look for non-linearity between output and time. Or better, find systems where output is independent of the time.

Do such models really exist? Before we answer that, let me share some anecdotes:

Anecdote 1: The last episode of Seinfeld aired in 1999. Since then the producers have launched DVDs and have had syndication deals with various networks. In 2015, Amazon acquired the rights to stream Seinfeld on Prime for $90 M (for 5 years, I think). After the Amazon-Seinfeld contract period got over, Netflix acquired the streaming rights in 2019 by paying $500 M to the producers!

Yes, it takes years and a lot of effort to make the first version of Seinfeld. I am not debating that. But once created, it can be replicated and distributed at will without much time or effort. And yet, the IP is fetching revenues in broadcast and streaming deals year after year and year.

Output is independent of input (time, effort).

Anecdote 2: Before the invention of the gramophone there were several local artistes who had a following. But once, music recording and playback became viable, even dead artistes were putting local artistes out of work.

Output is independent of input (time, effort).

Anecdote 3: A while back, I had written about toll roads (see here and here). A toll road costs a lot to build. But once built, it costs very little to maintain but can bring in a lot of revenues. For people that use the toll road, there is almost no viable alternate and therefore they’d rather pay to use it than to not pay and not use it. So, there is no relationship between the output (toll collection) and the input (cost to maintain the road).

Don’t just think roads. For example, Google and Facebook collect toll on the road of digital advertising. Visa, Mastercard collect toll on the road to credit card payments. Google Play store and Apple iTunes collect toll to distribute your apps. NSE collects toll on all share related transactions in India. Saregama is the toll collector on the road to retro Bollywood music. GAIL is the toll collector on the gas transmission road.

So toll roads like Seinfeld are created once, but collect toll forever.

Output is independent of input (time, effort).

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So, what are some of those assets that we can put to use to get such outcomes for ourselves:

1. Technology/ Internet. Technology has reduced the cost of replication and the cost of distribution to almost nil. Yes, there is a cost and effort to make it the first time; but once you do it, it can be replicated and distributed at will. So if you love to teach, teach on the internet. (A guy called Byju Raveendranath figured it before all of us. ) Here is a true story: a friend of a friend was a software architect. He created an online course on Udemy on how to learn Java. He quit his job the day he realized that he is earning far more from that one course than all the hours at work.
2. Brand. It takes a long time to build a brand. But once you build a brand, it takes very little effort to convince your customers. You may not care for the brand of sugar or salt but you do about the chocolate that you buy. Hence on a per unit basis you pay far more for chocolate than you do for sugar. (It costs Rs 0.5 per gram of 5-star vs Rs 0.05 per gram of sugar. And you’d rather gift somebody 5-star than you’d sugar.)
3. Skills. Hard skills like reading, writing, coding, cooking, dancing…all take time to acquire. But the rate of acquisition increases with each passing year. Any investment in skills is an investment in yourself. I know a man who is much sought after even after his retirement for his hard skills. And he can choose when to work and when to chill.
4. Equity. When you own equity, you own a piece of the business. Now if it is a business that uses non-linearity then you as a part owner will benefit too. And vice-versa, avoid businesses that don’t have non-linearity.
5. IP. Think of the Seinfeld example mentioned above. Decades after the show went off air, their money box is still ringing and louder. Well, it’s not practical to think of making a hit sitcom. Instead, you can own shares of a company that owns such IP.

The list is only indicative, not exhaustive.

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10 years ago, I would have dismissed what Naval Ravikant had to say (see below) as totally useless. And having dismissed it, I would have gone back to working (in a linear system) and said it doesn’t work. There is an ancient Chinese saying: the master appears only when the student is ready. It took me a long time to get ready.

I quit my job in 2017 because I was so inspired by Warren Buffett’s letters. I wanted to invest to live and live to invest. It was not about money as much as it was about doing something you love. If my life as an employee was linear, my life as a self-employed investor has been independent. It has shown me that my current outcomes don’t dependent on time but on decisions and luck. But I needed to experience this to truly appreciate what Naval Ravikant had to say.

Do take out some time to read and re- read the piece below. Every line here is pure gold.

If you don’t own a piece of business, you don’t have a path to financial freedom. If you are paid for renting out your time, even lawyers and doctors, you can make some money, but you aren’t going to make the money that gives you financial freedom. Without ownership, your inputs are very closely tied to your outputs. Without ownership, when you’re sleeping you are not earning. When you’re on vacation, you are not earning. When you’re retired, you are not earning. And you can’t earn non-linearly.

(Therefore) you want to own equity. Owning equity in a company basically means you own the upside… Everybody who makes money at some point owns a piece of a product, a business or some IP….These are the routes to wealth. It doesn’t come through the hours.

– Naval Ravikant from The Almanack of Naval Ravikant

So…write a book. Compose a song. Start a YouTube channel with some meaningful content. Learn some hard skills. Teach on Udemy. Find some good investors who can invest your money in companies with a bright prospects. In short, look to break the linear relationship between your financial outcomes and your time.

-Cheers

PS: By output and outcome, I mean financial outcomes. By input, I mean time and effort.

Featured photo by Mike Petrucci on Unsplash