Letter to Ansh — 8
Dear Ansh
It is Sunday morning 17th February, you reached Rasayani late last night. The first thing it seems you went for is the electronic piano they have, you seem to have a knack for music and rhythm. It is an absolute joy to watch you have fun with music and dance.
I intend to continue writing the next few letters about money and entrepreneurship. I am hoping to tell you everything I know, things that it took me almost a few decades to learn. If only I knew these things early on, I would have been able to move on things faster. It is amazing how our education systems of today do not place any value on teaching kids about how money works, which is one of the most important life skills one can have.
Money is a representation of value. And you can get value in exchange of value in a society based on fair laws. When you grow up you will learn about Newton’s law of conservation of energy. It goes something like this, “Energy cannot be created or destroyed, it can only be converted from one form to another. The total amount of energy in the universe remains constant”.
Value is however is different. It can be created and destroyed. Those who are rich are able to generate and keep more of the value for themselves. While those who are poor are unable to keep any value for themselves.
Assuming you do not resort to stealing, robbery or emotional blackmail to get value, the only way to get value is to offer value in return. Most people do that by doing a job, becoming an employee for others. Here you exchange your skills, effort and most importantly time in return of money in the form of a salary. As part of your job you are expected to create significant value for your employer who will then give some of it (usually a very small portion) of it back to you as a salary.
How is this fair to get only a small portion of value back in return of the huge value you create?
It is actually quite fair. While you execute the process of creating value, the process itself is defined by your employer. Finding and perfecting the process of creating value from the effort is where bulk of the magic happens. Some people look at the towers in Dubai and say that the labourers are the ones who actually built it. But that is not the truth, the labourers are not the key component here. Would they be able to build it themselves without being told what to do? Would they able to self organize and create a architecturally sound tower that is more than a kilometer high?
The reality is most people want to be told what to do, they will exchange their time and effort for the certainty or the perception of certainty. Most of us can only think so far out. They will talk about work life balance and complain about how they do not enjoy their jobs. But they will also baulk at the first sign of uncertainty. Creating something out of nothing requires the ability to deal with uncertainty. It is the developer of the tower who conceives the tower and puts together the big pieces, team and capital to execute the project. This is the prime mover who puts the machine in motion. The employees are generally replaceable cogs in the machine.
Without the vision of the prime mover the machine will not move, heck it won’t even be created in the first place.
When you do a job as an employee you are exchanging your time and effort in return of money. Your returns are a linear function of the time you spend working. But it is a suckers bet because the most important asset you have is your time. You only have limited time in your life. Money can be earnt back, time cannot. So to exchange time in return of money when you only possibly can get a linear return and that too for only a small portion of the value you generate is absolute folly. Yet most people will resort to this folly day in day out because they want certainty.
The only way to get more money and be wealthy is to get value in a manner that is not linked to being a linear function of your time. You have to create processes that create money for you that can run in parallel. You have to create virtual clones of yourselves that focus on creating money for you even while you sleep.
How do you do that?
Let’s start with a simple example. When you grow up we will take you to plays. Acting in a play is one of the hardest things an actor can do. There are no retakes. Everything is live and done right in front of an audience. The slightest mistake can blow the whole thing up. On the other hand a cinema actor does not play live in front of an audience. He or she gets as many retakes as they need to perfect a scene. And once the scene is perfected they do not have to act again and again to make money. While the play actor has to do the same scene day in and day out.
Clearly the play actor works harder in a much harder setting, yet you will find that the cinema actors make far money and have greater fame than play actors worldwide.
This is precisely because of the fact that they record their scene and it is played across the world again and again when the cinema plays without them having to do it again. When a play is conducted there may be a few hundred in audience each time. Who pay lets say a few dollars in ticket price. But when a cinema is played an equal amount of audience gets to watch it in one showing alone. And then the showing can be repeated an endless amount of times without the actors having to do anything more.
The tickets for a cinema are also generally lower than a play. The audience derives enjoyment from both plays and cinema. But it has to pay less for a cinema and a far far greater audience can get to see the cinema than a play possibly can.
In a job you serve one employer. In a play you serve a few hundred employers each time (who are your audience). In a cinema you create endless virtual replicas of yourselves who go and serve millions of employers generating value for them in the form of enjoyment and bring value for in return in the form of money.
The way to make more money is to create more value for more people, who will then give a portion of the value back to you. The more value you generate for others, the more value you will get in return. That is how you become wealthy. And in order to do it in a manner that is not linked solely to your time, you have to commoditize the value creation part.
Commoditizing the value creation part and separating it from your time is the essence of becoming wealthy
It is actually a quite simple concept. In practice to execute it can be quite hard though as knowing what people want and will be willing to pay money for is where most people struggle. There are however a few simple ways to get an answer to that and we will discuss that in the coming letters.
We will talk about finding and commoditizing that value, we will also touch on body shops and investing which are all different aspects of wealth creation.
Your loving father
Moresh
