Sam Hinkie, Leverage & Dynamic Decision-Making

Lucky Maverick: The Art and Science of Betting on Yourself

About Lucky Maverick

About Jonathan Bales

Note: If you notice Jake’s voice sounds like he has the flu in the audio version, don’t worry…he doesn’t have the flu! It’s just COVID.

I started fishing last year. Like any hobby I take up, I’ve become intensely serious about it to the point no one around me wants to be involved. I started tracking aspects of every catch in Excel; in just over a year, I’m up to 53 different species, not to brag. My goal is to catch as many species as possible.

If you ever see someone snagging lunker largemouth bass all day…that ain’t me. I already got that species. No need for more. I’m more of the type to be fishing for microspecies in a puddle using hooks that can blow away with a slight breeze.

You don’t know what it’s like to feel the strength of a fish until you’re lightly tugging a minnow out of a puddle using a piece of a worm the size of a grain of sand for bait. Just raw power.

Racking up species in fishing is all about leverage. The rod itself is a type of lever, letting you easily reel in even very powerful fish that are much stronger than you in water. I also often use multiple rods—usually one with the bait sitting at the bottom, one in the middle of the water column, and then actively using one with a spinner or topwater bait. You can use three rods at a time where I live, but theoretically, you could use quite a few more rods to increase the number of fish you catch without substantially more effort.

Well, the key to finding success—and specifically to making money—is the same as it is in racking up fish species smaller than your pinky: figure out what works—where the fish are and how to catch them—and apply leverage.

Leverage in Today’s World

Many of my thoughts on leverage have been inspired by Naval Ravikant. Check out his famous tweet thread on how to get rich (without getting lucky):

As Naval has pointed out, there are many different types of leverage, with the oldest form being labor: getting people to work for you. This, along with capital, are what people generally think of when it comes to being an entrepreneur or starting a business. And typically, that’s what business has meant: hire employees and raise money to grow.

Labor and capital are forms of permissioned leverage, meaning you can’t really just employ them on your own. You ultimately need someone’s permission to work with them, and you need permission to access others’ money.

The internet has created new forms of leverage, however, that do not require permission. What I’m doing right now—writing online—is a form of permissionless leverage. I don’t need anyone’s approval to post this, yet it supplies ultimate leverage on my time. This article can live forever, and whether it’s seen by 10 people or one million, there’s no additional work for me. And if I do a decent job, a whole lot of people will trust in me more and more, and that compounds over time in a non-linear way.

Software is another form of permissionless leverage. When I co-founded FantasyLabs, we didn’t need to ask anyone if it was okay that we did it. We built a product that can effectively run on its own, 24/7, and scale without any additional work. We can acquire more and more users at nearly no additional cost, whether its more energy or money; no matter if we have 100 users or 100,000 users, the costs in both time and capital are effectively the same. That’s leverage.

The internet has created a world in which there’s an abundance of money-making opportunities that allow individuals to earn like companies, but most people don’t yet realize it.

There’s a reason we built FantasyLabs as a data and tools platform rather than a service to give picks. One is sustainable and can grow without additional work; the other cannot.

There’s a reason I write almost no content that’s time-sensitive. This article doesn’t have an expiration date and can continue to “work” for me forever; a timely article would get more clicks in the short-term, but does effectively nothing to improve long-term leverage.

A useful way to figure out what type of leverage you’re applying on your work: ask yourself if the potential rewards are a direct result of the time you put in. If putting in more time guarantees a better result, this might not actually be a good thing; a salesperson working on commission might make more money by putting in more hours, but there’s no ability to earn 10x or 100x or 1,000x on their time. The salesperson—and most everyone else with an employer—is the lever for someone else to get rich.

You’ll have a difficult time becoming wealthy by getting paid for your time. You have to get paid for the value you can create for others through your unique knowledge, multiplied by the leverage you place on it. The returns from this sort of work—amplified by the internet—are compounding. This increases the importance of logical decision-making. When the results of your decisions are non-linear, it amplifies their impact.

If you consider yourself a sharp decision-maker and you have unique knowledge or skills, there’s never been a better time to get rich. The theoretical bounds of the value you can extract are nearly limitless.

* Acquire specific knowledge or develop a unique skill. This is another form of permissionless leverage and it’s easy to unlock with the internet. You probably already have a lot of specific knowledge in areas of interest to you. The intersection of those areas is likely where you have the most unique knowledge.

* Apply leverage to your distinct knowledge through media or code, i.e. leverage your knowledge to create online content or software. You can use labor and money, too, but they’re no longer required.

* Focus on “evergreen” work; put time into things that have no theoretical limit for how much they can earn and require no additional work from you—things for which the cost of replication is zero or near-zero. And “earn” can mean money, but it can also mean trust or respect or some other output that can be monetized at a later date. I’m not currently making money from this newsletter, but it’s still providing leverage.

In the age of near-infinite leverage, you don’t get rich based on how hard you work. You get rich by having specific knowledge, creating something of value to others, and applying leverage to it.

Static vs. Dynamic Decision-Making

I recently came across this video from Nassim Nicholas Taleb called “How you will go bust on a favorable bet.”

Most of the video is pretty mathematical, but it’s ultimately his proof of this quote, which I really like.

Your grandmother does not analyze the notion of smoking as a single event of smoking a cigarette, but rather as an activity. Risk-taking is an activity, not a single event.

Smoking a single cigarette is not very harmful to your body. Let’s assume you determine the cost-benefit of smoking once to be in favor of lighting up; maybe the relaxation it gives you is mathematically worth the downside for that single cigarette. It still should be clear the decision to smoke is -EV (dynamically speaking) because it will increase the chances of you smoking again…and again…and again.

Almost no worthwhile decision is static. When there is great downside, you should make decisions as though you’d need to make the same choice 10,000 more times. You might play Russian roulette once for $1 billion, but if you keep taking such an offer, you’ll soon be dead.

That’s not to say you can’t ever take on big risk—the opposite, actually, as you can and should try to run it up when the consequences for financial “death” (going bust) are minimal. That is, if you have $100 to your name, it’s not terribly detrimental to go bust; if you have $1 million, then you probably should protect your downside.

Viewing decision-making as dynamic actually increases the merits of taking on huge risk early on—even -EV risks. I’m sure you’ve seen the graphs of what your net worth will be at 65 if you invest $X starting at age 25 instead of beginning at 35. Each additional dollar you acquire is theoretically slightly less valuable than the one before it, but if you’re overall a +EV decision-maker, you could argue the importance of quickly generating a small fortune is more meaningful than slight changes in EV such that the only fundamentally wrong decision you can make is not taking big risks.

In my article on why most decisions don’t matter, the first criteria I proposed for making a choice: “Is one option clearly the best long-term?” Decisions aren’t made in a vacuum, and the biggest mistake you can make is viewing them statically—analyzing choices as an event rather than an activity.

And the God of long-term decision-making is this man…

Sam Hinkie on Invest Like the Best

Being from Philly, I’m of course a huge fan of Sam Hinkie (and the ”Hinkie “Manifesto”). I highly recommend listening to his recent appearance on the Invest Like the Best podcast. Some of my favorite quotes:

Expertise is a predictive model about the future that works. I don’t care how you got there. It might be instincts. It might be actual data. Experience is how many times you’ve done this. That doesn’t mean people with experience can’t have expertise, but they’re wildly different things.

I look for people cognizant of their weaknesses. The ones I really like are the ones open about their weaknesses and keeping them their weaknesses because they think it’s an infinite game that you don’t understand yet.

I like people who are among the very best in the world and can’t believe it. They’re worried someone else out there is better. You’re underplaying your skills—not overplaying them—and you’re constantly looking for new edges because you presume there just must be someone out there who is better.

Amazing people are often drawn to be around other amazing people who have a lot of intellectual humility about what they don’t yet know and have a sense of wonder about what’s knowable.

Most of your ability to influence people is about the quality of the relationships you’ve built over time.

People are a power law, and the best ones can change everything.

I think in decades by nature. Where is this thing going? What aren’t people thinking about? What are the second- and third-order effects? And I want there to be leverage on that type of thinking. Leverage on trying to see around the bend.

As a general principle, you should trade money for time as much as you possibly can.

Write. Put your thoughts out there, particularly if you want to make them better. I’ve only recently realized the return of writing well.

Goodhart’s Law

I was recently looking through some of the metrics for Lucky Maverick. I try not to get too caught up in site analytics because they’re typically a byproduct of certain actions rather than a forward-looking indicator. For some sites, I think the average time a user spends on a page is important because it conveys engagement—how much people care what you have to say—but once you chase the effect (trying to maximize time-on-site), it’s no longer a useful metric. That is, you shouldn’t specifically try to maximize the time a user spends on your site, as you’ll do things that will hinder the engagement; thus, the metric, once sought after, becomes self-refuting.

Well, this is Goodhart’s law:

When a measure becomes a target, it ceases to be a good measure.

A famous example of this is a hospital that was threatened with penalties for long wait times. In response, they asked ambulances to keep patients inside for extended periods so as to not create a “wait” inside the hospital.

We see Goodhart’s law everywhere. Car salesmen sell vehicles at a loss near the end of the month to hit quotas; online media companies optimize for clicks (to their long-term detriment); NFL teams historically have tried to run the ball way too frequently because “teams win X% of the time when they run Y times.”

Goodhart’s law is effectively a variant of a logical error known as “affirming the consequent,” or:

If A then BBTherefore, A

This is logically inconsistent. Take this example.

If I eat healthy and exercise, I will lose weight.I lost weight.Therefore, I ate healthy and exercised.

There are a lot of unhealthy ways one could lose weight. In fact, I’d say “weight” is one of the prime examples of a metric that represents Goodhart’s law. Weight is correlated to a healthy lifestyle, but when you chase a lower weight as an end in and of itself, especially in the short-term, you’ll often end up doing the exact opposite types of things that actually lead to being healthy with a long-term sustainable weight.

I think this is important because I see this mistake made over and over again, in all areas of life—from gambling to business to health to investing.

Just because a number is a good indicator of a certain action doesn’t mean you should try to maximize it. In almost every instance, you shouldn’t.

ICYMI

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