All returns in life come from compound interest in long-term games
Play long-term games with long-term people
Nivi: Talk a little bit about what industries you should think about working in. What kind of job you should have? And who you might want to work with? So, you said, âOne should pick an industry where you can play long-term games with long-term people.â Why?
Naval: Yeah, this is an insight into what makes Silicon Valley work, and what makes high trust societies work. Essentially, all the benefits in life come from compound interests. Whether itâs in relationships, or making money, or in learning.
So, compound interest is a marvelous force, where if you start out with 1x what you have, and then if you increase 20% a year for 30 years, itâs not that you got 30 years times 20% added on. It was compounding, so it just grew, and grew, and grew until you suddenly got a massive amount of whatever it is. Whether itâs goodwill, or love, or relationships, or money. So, I think compound interest is a very important force.
You have to be able to play a long-term game. And long-term games are good not just for compound interest, theyâre also good for trust. If you look at prisonerâs dilemma type games, a solution to prisonerâs dilemma is tit-for-tat, which is Iâm just going do to you what you did last time to me, with some forgiveness in case there was a mistake made. But that only works in an iterated prisonerâs dilemma, in another words if we play a game multiple times.
So, if youâre in a situation, like for example youâre in Silicon Valley, where people are doing business with each other, and they know each other, they trust each other. Then they do right by each other because they know this person will be around for the next game.
Now of course that doesnât always work because you can make so much money in one move in Silicon Valley, sometimes people betray each other because theyâre just like, âIâm going to get rich enough off this that I donât care.â So, there can be exceptions to all these circumstances.
But essentially if you want to be successful, you have to work with other people. And you have to figure out who can you trust, and who can you trust over a long, long period of time, that you can just keep playing the game with them, so that compound interest, and high trust will make it easier to play the game, and will let you collect the major rewards, which are usually at the end of the cycle.
So, for example, Warren Buffett has done really well as an investor in the U.S. stock market, but the biggest reason he could do that was because the U.S. stock market has been stable, and around, and didnât get for example seized by the government during a bad administration. Or the U.S. didnât plunge into some war. The underlying platform didnât get destroyed. So, in his case, he was playing a longterm game. And the trust came from the U.S. stock marketâs stability.
When you switch industries, youâre starting over from scratch
In Silicon Valley, the trust comes from the network of people in the small geographic area, that you figure out over time who you can work with, and who you canât.
If you keep switching locations, you keep switching groups⌠letâs say you started out in the woodworking industry, and you built up a network there. And youâre working hard, youâre trying to build a product in the woodworking industry. And then suddenly another industry comes along thatâs adjacent but different, but you donât really know anybody in it, and you want to dive in, and make money there.
If you keep hopping from industry to ⌠âNo, actually I need to open a line of electric car stations for electric car refueling.â That might make sense. That might be the best opportunity. But every time you reset, every time you wander out of where you built your network, youâre going to be starting from scratch. Youâre not going to know who to trust. Theyâre not going to know to trust you.
There are also industries in which people are transient by definition. Theyâre always coming in and going out. Politics is an example of that, right? In politics new people are being elected. You see in politics that when you have a lot of old-timers, like the Senate, people who have been around for a long time, and theyâve been career politicians.
Thereâs a lot of downside to career politicians like corruption. But an upside is they actually get deals done with each other because they know the other person is going to be in the same position ten years from now, and theyâre going to have to keep dealing with them, so they might as well learn how to cooperate.
Whereas every time you get a new incoming freshman class in the House of Representatives, which turns over every two years with a big wave election. Nothing gets done because of a lot fighting. âBecause I just got here, I donât know you, I donât know if youâre going to be around, why should I work with you rather than just try to do whatever I think is right?â
So, itâs important to pick an industry where you can play long-term games, and with long-term people. So, those people have to signal that theyâre going to be around for a long time. That theyâre ethical. And their ethics are visible through their actions.
Long-term players make each other rich
Nivi: In a long-term game, it seems that everybody is making each other rich. And in a short-term game, it seems like everybody is making themselves rich.
Naval: I think that is a brilliant formulation. In a longterm game, itâs positive sum. Weâre all baking the pie together. Weâre trying to make it as big as possible. And in a short term game, weâre cutting up the pie.
Now this is not to excuse the socialists, right? The socialists are the people who are not involved in baking the pie, who show up at the end, and say, âI want a slice, or I want the whole pie.â They show up with the guns.
But I think a good leader doesnât take credit. A good leader basically tries to inspire people, so the team gets the job done. And then things get divided up according to fairness, and who contributed how much, or as close to it as possible, and took a risk, as opposed to just whoever has the longest knife⌠the sharpest knife at the end.
Returns come from compound interest in iterated games
Nivi: So, these next two tweets are, âPlay iterated games. All returns in life, whether in wealth, relationships, or knowledge come from compound interest.â
Naval: When you have been doing business with somebody, youâve been friends with somebody for ten years, twenty years, thirty years, it just gets better and better because you trust them so easily. The friction goes down, you can do bigger, and bigger things together.
For example, the simplest one is getting married to someone, and having kids, and raising children. Thatâs compound interest, right? Investing in those relationships. Those relationships end up being invaluable compared to more casual relationships.
Itâs true in health and fitness. You know, the fitter you are, the easier it is to stay fit. Whereas the more you deteriorate your body, the harder it is to come back, and claw your way back to a baseline. It requires heroic acts.
Nivi: Regarding compound interest, I think I saw retweet something a while back. Maybe it was from Ed Latimore. It went something along the lines of, âGet some traction. Get purchase, and donât lose itâ [correction: the tweet is by @mmay3r]. So, the idea was to gain some initial traction, and never fall back, just keep ratcheting up, and up.
Naval: I donât remember it exactly. But I think that was right. Yes, it was like, âGet traction, and donât let go.â It was a good one, yes.