Externalities let you account for the true cost of products by including hidden costs
Nivi: What’s a mispriced externality? You mentioned it on a previous episode.
Naval: An externality is where there’s an additional cost imposed by whatever product is being produced or consumed, that’s not accounted for in the price of the product. This can happen for many reasons. Sometimes you can fix it by putting the cost back into the price.
Some of the most ardent critics of capitalism argue it’s destroying the environment. If you throw away capitalism because it’s destroying the environment, then guess what—we’re all headed back to pre-industrial times. That’s not going to be a good thing.
Pricing externalities properly is more effective than feel-good measures
Because the environment is finite and precious, we have to price it properly and fold that back into the cost of products and services.
If people are wasting water, releasing hydrocarbons into the atmosphere or polluting in other ways, society should charge them what it costs to clean up the pollution and return the environment to a pristine state. Perhaps that price has to be very, very, very high.
If you raise the price high enough, you’ll knock out pollution. That’s much better than feel-good measures like banning plastic bags or restricting showers during a drought.
Properly pricing externalities can save resources in a tremendous way
California likes to run declarations and ads to scare people into avoiding showers during droughts. It would be better to raise the price of fresh water. The average consumer might pay a few pennies more for a shower, but the almond farmers—who consume a lot of water—will cut back; and almond farming may move to a part of the country where water is more abundant.
Properly pricing externalities can save resources in a tremendous way. It’s a good framework to use when you want to do things like save the environment, rather than doing feel-good things that won’t actually amount to anything.
Bonus: Finding Time to Invest in Yourself
If you have to work a “normal job,” take on accountability to build your specific knowledge
Nivi: A common question we get: “How do I find the time to start investing in myself? I have a job.”
You have to rent your time to get started
In one of the tweets from the cutting room floor, you wrote: “You will need to rent your time to get started. This is only acceptable when you are learning and saving. Preferably in a business where society does not yet know how to train people and apprenticeship is the only model.”
Naval: Try to learn something that people haven’t quite figured out how to teach yet. That can happen if you’re working in a new and quickly expanding field. It’s also common in fields that are circumstantial—where the details matter and it’s always moving. Investing is one of those fields; so is entrepreneurship.
Chief of staff for a founder is one of the most coveted jobs for young people starting out in Silicon Valley. The brightest kids will follow an entrepreneur around and do whatever he or she needs them to do.
In many cases, the person is way overqualified. Someone with multiple graduate degrees might be running the CEO’s laundry because that’s the most important thing at the moment.
At the same time, that person gets to attend the most important meetings. They are privy to all the stress and theatrics, the fundraising decks and the innovation—knowledge that can only come from being in the room.
Coming out of college, Warren Buffett wanted to work for Benjamin Graham to learn to be a value investor. Buffett offered to work for free, and Graham responded, “You’re overpriced.” What that means is you have to make sacrifices to take on an apprenticeship.
Find the part of the job with the steepest learning curve
If can’t learn in an apprenticeship model because you need to make money, try to be innovative in the context of your job. Take on new challenges and responsibilities. Find the part of the job with the steepest learning curve.
You want to avoid repetitive drudgery—that’s just biding time until your job is automated away.
If you’re a barista at the coffee shop, figure out how to make connections with the customers. Figure out how to innovate the service you offer and delight the customer. Managers, founders and owners will take notice.
Develop a founder mentality
The hardest thing for any founder is finding employees with a founder mentality. This is a fancy way of saying they care enough.
People will say, “Well, I’m not the founder. I’m not being paid enough to care.” Actually, you are: The knowledge and skills you gain by developing a founder mentality set you up to be a founder down the line; that’s your compensation.
You can get a lot out of almost any position. You just have to put a lot into it.
Accountability is something you can take on immediately
Nivi: We’ve discussed accountability, judgment, specific knowledge and leverage. If I’m working a “normal” job, is specific knowledge the one I should focus on?
Naval: Judgment takes experience. It takes a lot of time to build up. You have to put yourself in positions where you can exercise judgment. That’ll come from taking on accountability.
Leverage is something that society gives you after you’ve demonstrated judgment. You can get it faster by learning high-leverage skills like coding or working with the media. These are permissionless leverage. This is why I encourage people to learn to code or produce media, even if it’s just nights and weekends.
So, judgment and leverage tend to come later. Accountability is something you can take on immediately. You can say, “Hey, I’ll take charge of this thing that nobody wants to take charge of.” When you take on accountability, you’re also publicly putting your neck on the chopping block—so you have to deliver.
You build specific knowledge by taking accountability for things that other people don’t know how to do. Perhaps they’re things you enjoy doing or are naturally inclined towards doing anyway.
If you work in a factory, the hardest thing may be raising capital to keep the factory running. Maybe that’s what the owner is always stressed out about.
You might notice this and think, “I’m good at balancing my checkbook and have a good head for numbers; but I haven’t raised money before.” You offer to help and become the owner’s sidekick solving their fundraising problem. If you have a natural aptitude and take on accountability, you can put yourself in a position to learn quickly. Before long, you’ll become the heir apparent.
Early on, find things that interest you and allow you to take on accountability. Don’t worry about short-term compensation. Compensation comes when you’re tired of waiting for it and have given up on it. This is the way the whole system works.
If you take on accountability and solve problems on the edge of knowledge that others can’t solve, people will line up behind you. The leverage will come.
Specific knowledge can be timely or timeless
There are two forms of specific knowledge: timely and timeless.
If you become a world-class expert in machine learning just as it takes off and you got there through genuine intellectual interest, you’re going to do really well. But 20 years from now, machine learning may be second hat; the world may have moved on to something else. That’s timely knowledge.
If you’re good at persuading people, it’s probably a skill you picked up early on in life. It’s always going to apply, because persuading people is always going to be valuable. That’s timeless knowledge.
Now, persuasion is a generic skill—it’s probably not enough to build a career on. You need to combine it in a skill stack, as Scott Adams writes. You might combine persuasion with accounting and an understanding of semiconductor production lines. Now you can become the best semiconductor salesperson and, later on, the best semiconductor company CEO.
Timeless specific knowledge usually can’t be taught, and it sticks with you forever. Timely specific knowledge comes and goes; but it tends to have a fairly long shelf life.
Technology is a good place to find those timely skills sets. If you can bring in a more generic specialized knowledge skill set from the outside, then you’ve got gold.
Technology is an intellectual frontier for gaining specific knowledge
Nivi: There were a couple other tweets from the cutting-room floor on this topic. The first: “The technology industry is a great place to acquire specific knowledge. The frontier is always moving forward. If you are genuinely intellectually curious, you will acquire the knowledge ahead of others.”
Naval: Danny Hillis famously said technology is everything that doesn’t work yet. Technology is around us everywhere. The spoon was technology once; fire was technology once. When we figured out how to make them work, they disappeared in the background and became part of our everyday lives.
Technology is, by definition, the intellectual frontier. It’s taking things from science and culture that we have not figured out how to mass produce or create efficiently and figuring out how to commercialize it and make it available to everybody.
Technology will always be a great field where you can pick up specific knowledge that is valuable to society.
If you don’t have accountability, do something different
Nivi: Here’s another tweet from the cutting-room floor related to accountability: “Companies don’t know how to measure outputs, so they measure inputs instead. Work in a way that your outputs are visible and measurable. If you don’t have accountability, do something different.”
Naval: The entire structure of rewarding people comes from the agricultural and industrial ages, when inputs and outputs matched up closely. The amount of hours you put into doing something was a reliable proxy for what kind of output you’d get.
Today, it’s extremely nonlinear. One good investment decision can make a company 100 million. One good product feature can be the difference between product-market fit and complete failure.
As a result, judgment and accountability matter much more. Often the best engineers aren’t the hardest workers. Sometimes they don’t work very hard at all, but they dependably ship that one critical product at just the right time. It’s similar to the salesperson who closes the huge deal that makes the company’s numbers for the quarter.
People need to be able to tell what role you had in the company’s success. That doesn’t mean stomping all over your team—people are extremely sensitive to others taking too much credit. You always want to be giving out credit. Smart people will know who was responsible.
Some jobs are too removed from the customer for this type of accountability. You’re just a cog in a machine.
Consulting is a good example. As a consultant, your ideas are delivered through someone else within the organization. You may not have visibility to the top people; you may be hidden behind a screen. That’s a trade-off you’re making in exchange for your independence.
You’ll develop thick-skin if you take on accountability
When you have accountability, you get a lot more credit when things go right. Of course, the downside is you get hurt a lot more when things go wrong. When you stick your neck out, you have to be willing to be blamed, sacrificed and even attacked.
If you’re the kind of person who thrives in a high-accountability environment, you’re going to end up thick-skinned over time. You’re going to get hurt a lot. People are going to attack you if you fail.
Scale your specific knowledge with apprentices
Nivi: Once you get some specific knowledge, you can scale it by training your own apprentices and outsourcing tasks to them.
Naval: For example, I made good investments and figured out the venture business. I could have kept doing that and making money. Instead, I co-founded Spearhead to train up-and-coming founders to become angels and venture investors. We give them a checkbook to start investing.
It’s an apprenticeship model. They come to us with deals they’re looking at, and we help them think it through. This model is more scalable than my personal investing.
Specific knowledge comes on the job, not in a classroom
At Spearhead we lead classes teaching founders about investing, and we also hold office hours to discuss specific deals they bring.
It turns out the classes and talks we lead are largely worthless. You can give all the generic advice people need in about an hour. After that, the advice gets so circumstantial that it essentially cancels to zero. But the office hours are incredibly useful.
This reinforces the notion that investing is one of those skills that can only be learned on the job. When you find a skill like that, you’re dealing with specific knowledge.
Another good indicator of specific knowledge is when someone can’t give a straight answer to the question: “What do you do every day?” Or you get an answer along the lines of, “Every day is different based on what’s going on.”
The thing is so complicated and dependent upon circumstances that it can’t be boiled down into a textbook form.
Nivi: The mafia figured out this apprenticeship model a long time ago. The best way to end up running one of the families was to become the driver for the Don.
Naval: Tony Soprano was a businessman who had to enforce his own contracts. That’s a very complicated business.
This transcript has been edited for clarity.