The Biggest Lesson From Studying Billionaires (Part One)
I’ve studied many of the most successful people in the history of our planet from titans of industry like John D. Rockefeller and Andrew Carnegie to modern day financial wizards like Warren Buffett, Charlie Munger, and Ray Dalio.
What I’ve discovered from studying such a wide array of incredibly successful individuals is there are some striking similarities between what enabled a 19th century oil baron to succeed and what makes modern day billionaires like Bill Gates and Elon Musk thrive.
In fact — there is a core principle that holds the secret to what these uber-achievers unlocked — and it’s something I call “high leverage thinking.”
But before we dig into the core ideas of high leverage thinking — and how you can harness them for yourself, starting right now, it’s important to understand the relationship between time and value creation.
The Secret of Leverage
There is a non-linear relationship between time and value creation. The amount of time you spend on something does not have a direct relationship to the amount of value you create.
This doesn’t just have to do with financial success — but it is extremely easy to demonstrate this principle using money.
For someone making $50,000 a year, if they work twice as a hard, maybe they can double their income to $100,000 a year. Once you start moving up the ladder, this logic really starts to break down. It wouldn’t be possible for the same person to work 10x as hard to make 10x as much ($500k a year), because that would require working 400 hours per week, and the week only has 168 hours!
The numbers get crazy when you look at billionaires and titans of industry. According to Wealth-X data from 2013, Warren Buffett made $12.7bn that year which breaks down to $37mm per day and $1.54mm per hour. Now that’s a serious hourly rate.
Is Warren Buffet working 254,000 times harder than someone making $50k a year?
In fact, Warren Buffett says himself that he spends 80% of his day reading! But we will come back to the tactics and strategies these ultra achievers use to be so productive in a minute.
So what gives? How is this possible? What’s the missing ingredient?
The missing piece of the puzzle is LEVERAGE. Warren Buffett, Bill Gates, and all of these titans of industry are masters of leverage. Achieving more by doing less and focusing on what’s important. Warren Buffet is making 254,000x more per hour because he is more high leverage.
The math behind this phenomenon is the 80/20 principle, which pervades huge amounts of our lives describing everything from the distribution of craters on the moon, to the size of files on your hard drive, to rabbit populations, pea pods, and the distribution of wealth of both nations and individuals.
Simply put, the 80/20 principle (which is a “Mental Model,” more on that in a minute) states that a few of your inputs create most of your outputs. A few high leverage activities create the vast majority of the results in your life, and this powerful economic principle, applied many times over, is the math that drives the mammoth differential between Warren Buffets return on time and yours or mine.
The Art of Decision-Making
So now we know that these titans of industry are vastly more high leverage than people who are making millions per year. But what are they doing?
After studying them deeply, reading dozens biographies, combing through speeches and articles, and picking apart activities and daily routines — I’ve uncovered the two core strategies these uber-achievers use to become as high leverage as possible.
The first strategy of high leverage thinking is improving your decision-making ability — this is what I call “The Art of Decision-Making.”
The Power of Compounding
Improving your ability to think, understand reality, and make better decisions is one of the core principles of high leverage thinking. The more time and energy you invest in your decision-making ability, the more it continues to build and build on itself by harnessing the power of compounding (compounding is another example of a Mental Model, by the way).
Becoming a master at the Art of Decision-making cascades through everything you do. It’s not incremental growth in your knowledge, it’s exponential growth. Einstein described the power of compounding as the “eight wonder of the world” — and if you’ve ever crunched some numbers on a compound interest calculator you know how powerful compounding can be over time.
If you get 1% better at thinking — at understanding how the world works, how human behavior works, how economic systems function, and understanding your own brain — that 1% improvement impacts everything you do. You’re not just going to benefit at work, but when you deal with your spouse, or negotiate the purchase of a new car, or decide where to invest your savings. You’re entire life is essentially a long chain of decisions. Wouldn’t it make sense to invest in the ability to make better decisions and continuously improve that skillset?
These small incremental improvements in decision-making aren’t noticeable at first, but they eventually result in a huge transformation in how you think, act, and understand the world.
Here’s a quote from our dear friend Warren Buffett, when asked what the key to success was he pointed to a stack of books and said:
“Read 500 pages like this every day. That’s how knowledge works. It builds up, like compound interest. All of you can do it, but I guarantee not many of you will do it.”
Study Things That Never Change Over Time
A key piece of building a compounding machine of knowledge — that over time will let you vault over almost everyone on the planet in terms of sheer brain power — is focusing on knowledge that doesn’t change or changes very slowly over time.
Many people focus their time and energy on learning rapidly changing tactics, the minutiae, highly specific actions and pieces of advice without a broader context. As Sun Tzu once said “tactics without strategy is the noise before defeat” and Ralph Waldo Emerson said:
“As to methods, there may be a million and then some, but principles are few. The man who grasps principles can successfully select his own methods. The man who tries methods, ignoring principles, is sure to have trouble.”
I’m here to teach you how to be one of the people who masters the principles that govern reality — so that you can wield them to achieve whatever goals you want to achieve.
People gobble up the latest article “10 Things You Can Do To Improve Your Email Opt-In Rate” but the problem with studying knowledge like that is that it changes — it doesn’t give you something to build up and build upon over time — in 18 months all of the advice in that article will be useless. If you spent a year in 2004 reading every book on high performance banner ads — none of that knowledge would be relevant today.
But if you flip that, if you study the strategy — spend your time mastering the core principles that underpin psychology and human behavior, reading things like the book Influence by Robert Cialdini — you can invent marketing tactics on the fly — because you understand the bigger picture. And that knowledge changes very slowly over time — it’s a core foundation that you can build upon and grow from.
This also means that the best kind of knowledge to focus on and spend your time investing in is not ephemeral junk like facebook, twitter, and buzzfeed, but the core pillars of human knowledge and the major academic disciplines, which brings us to the principle of Worldly Wisdom
Worldly Wisdom
The next key component of The Art of Decision-making is cultivating what Charlie Munger (the billionaire business partner of Warren Buffett) called Worldy Wisdom.
Here’s a great description of the concept of worldly wisdom from Robert Griffin’s book “Charlie Munger: The Complete Investor:”
Munger has adopted an approach to business and life that he refers to as worldly wisdom. Munger believes that by using a range of different models from many different disciplines — psychology, history, mathematics, physics, philosophy, biology, and so on — a person can use the combined output of the synthesis to produce something that has more value than the sum of its parts. Robert Hagstrom wrote a wonderful book on worldly wisdom entitled Investing: The Last Liberal Art, in which he states that “each discipline entwines with, and in the process strengthens, every other. From each discipline the thoughtful person draws significant mental models, the key ideas that combine to produce a cohesive understanding. Those who cultivate this broad view are well on their way to achieving worldly wisdom.”
Being multidisciplinary means collecting knowledge from lots of different disciplines and areas of life and building an approach to understanding the world that integrates all that knowledge into a cohesive framework.
In order to get what you want you have to understand how to get there, and in order to do that, you have to understand how things work — things like human behavior, economic systems, money, biology, and mathematics. Josh Kaufman explains this beautifully in The Personal MBA:
“Every business fundamentally relies on two factors People and Systems…To understand how businesses work, you must have a firm understanding of how people tend to think and behave — how humans make decisions, act on those decisions, and communicate with others. Recent advances in psychology are revealing why people do the things they do, as well as how to improve our own behavior and work more effectively with others.
Systems, on the other hand, are the invisible structures that hold every business together. At the core, every business is a collection of processes that can be reliably repeated to produce a particular result. By understanding the essentials of how complex systems work, it’s possible to find ways to improve existing systems, whether you’re dealing with a marketing campaign or an automotive assembly line.”
The problem is that too many people have a very narrow focus — they master one piece of the puzzle, say marketing or finance, and think that has all the answers. But reality is messy and complex and interwoven. Most big events in our lives aren’t caused by one simple explanation; they are the result of an interplay of factors.
A multidisciplinary approach intertwines and strengthens itself by enabling you to pull from different disciplines of knowledge and bring the exact tools necessary to understand and solve tough challenges and to achieve complicated and difficult goals. As Peter Bevelin writes in Seeking Wisdom:
“Since no single discipline has all the answers we need to understand and use the big ideas from all the important disciplines: Mathematics, physics, chemistry, engineering, biology, psychology, and rank and use them in order of reliability.”
A Framework of Mental Models
Now its time to go deeper into Mental Models, which we briefly touched on earlier. A mental model is simply a concept, an idea, a tidbit of wisdom that in some way explains how the world works. Mental models are one of the cornerstones of high leverage thinking. In fact, Charlie Munger puts it pretty bluntly:
“Developing the habit of mastering the multiple models which underlie reality is the best thing you can do.”
When a billionaire tells me something is “the best thing I can do” — I listen. And I’ve spent a tremendous amount of time studying billionaires, people like Charlie Munger, and mental models so that you don’t have to.
A few examples of mental models would be concepts like the 80/20 principle and compounding, both of which we discussed earlier, as well as concepts like expected value and base rates from mathematics, notions such as confirmation bias, anchoring, and social proof from psychology, the prisoner’s dilemma from game theory, or the concept of natural selection from biology.
While this may seem a bit overwhelming, the good news is that you don’t have to become an expert in physics and chemistry just to become a high leverage thinker. The whole idea is to master the big ideas . Take the major principles from a 101 textbook and combine them into a framework of mental models that offers a rich and deep tool kit to look at, understand, and manipulate reality to your ends.
The Key Ideas
To wrap up, remember the core ideas behind the Art of Decision-making:
(1) Harness the power of compounding by building on your knowledge and getting 1% smarter every day
(2) Focus on and study things that don’t change or change very slowly over time — master the principles and you can invent the tactics
(3) Follow the path of worldly wisdom and focus on acquiring multidisciplinary knowledge across academic disciplines like psychology, mathematics, and biology
(4) Build a toolkit of mental models so that you can better understand reality and achieve your goals.
When you combine all of these factors, you are putting your brain on a high leverage rocket ship — and with the power of compounding you will start leaving other people in the dust.
This is already getting pretty lengthy, so I’ve split it into two posts.
In part two, we will dive into the second key strategy of high leverage thinking that billionaires use.
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