Defining Opportunity and Leverage (w Ed Mylett) Pt. 1 Aug. '22 Ep 474



In this insightful discussion, Alex Hormozi shares his wisdom on business growth and opportunity evaluation, emphasizing the importance of selecting the right opportunities for maximum career leverage. He explains that income growth often hinges on the quality of opportunities rather than sheer work ethic, and introduces his formula for assessing business potential: market size, gross margin, and competitive dynamics. Alex also delves into the types of leverage - labor, capital, code, and media - and their pivotal role in scaling a business. He advises entrepreneurs to invest in high cash flow, low capital expense ventures, especially during inflationary periods. Reflecting on personal motivation, Alex discusses leveraging one's emotions and experiences to drive success, and the importance of adapting these driving forces as one evolves. Lastly, he shares a poignant perspective on valuing the present, contemplating how our future selves would cherish our current moments and opportunities.

Summary Notes

Reflection on Age and Opportunity

  • Alex contemplates his future 85-year-old self and the desire to trade all his wealth to be 32 again, emphasizing the value of youth over material wealth.
  • He views business as a game and aims to document lessons learned through his journey with, aspiring to help others grow their businesses.
  • Alex's hope is that listeners can apply these lessons to achieve significant business milestones.

"I was thinking about my 85 year old self and I know that that man looking back at me today would trade everything. He has to be 32 again."

This quote illustrates the universal longing for youth and the recognition that the opportunities it presents are more valuable than accumulated wealth at an older age.

"The wealthiest people in the world see business as a game. This podcast, the game is my attempt at documenting the lessons I've learned on my way to building into a billion dollar portfolio."

Alex describes his podcast as a strategic endeavor to share his business insights and experiences, likening it to a game where the objective is to build a successful portfolio and assist others in their entrepreneurial pursuits.

Alex's Reputation and Anticipation for the Interview

  • The interviewer has been eagerly anticipating the conversation with Alex, having been impressed by his intelligence and unique content.
  • Alex's work in personal success and entrepreneurship is highlighted as detailed and special.
  • The urgency and excitement of the interviewer suggest that Alex's insights will be highly valuable to the audience.

"He is brilliant. I don't say that very often when I introduce people. I think he's probably got one of the highest iqs of anybody I've ever had on the show."

The interviewer expresses high regard for Alex's intellectual capabilities, setting the stage for the audience to expect valuable insights from the conversation.

Defining Opportunity

  • Alex analyzes the concept of opportunity, especially in the context of entrepreneurship and career growth.
  • He introduces a formula: volume times leverage equals output, emphasizing the importance of both effort and leverage.
  • Opportunity is defined through three factors: potential market size, gross margin potential, and competitive dynamics.
  • Alex uses telecommunications and the nascent cannabis industry as examples to illustrate the three factors in evaluating opportunities.

"And so if you think about any kind of output in a system, as volume times leverage equals output, the work has to start, so you have to have something to multiply, which is the effort, and then the next is that leverage."

Alex explains the fundamental equation for productivity in business, where effort must be combined with leverage to maximize output.

"How many potential units of the product can I sell? And then what is the gross margin potential of the product that I'm trying to sell? And then what are the competitive dynamics within the marketplace?"

This quote breaks down the criteria Alex uses to assess an opportunity, focusing on market size, profitability, and competition.

Evaluating One's Current Position

  • The interviewer brings up the importance of evaluating one's current situation, even if one is deeply invested in their current path.
  • Alex discusses the significance of timelines and opportunity costs when considering whether to stay the course or pivot.
  • He references Warren Buffett's philosophy of choosing the right "boat" to ensure greater success and applies this to entrepreneurial decisions.

"I think being selective about the opportunities we pursue is probably the greatest leverage point you have on your career."

Alex emphasizes the strategic importance of being selective with opportunities, suggesting that the right choice can have a substantial impact on one's career trajectory.

Impact of Inflation on Business Decisions

  • Alex and the interviewer discuss how inflation affects business choices, with Alex recommending businesses that have low capital expenses and produce high cash flow.
  • The ability to adjust prices and maintain profitability during inflationary periods is crucial, according to Alex.
  • He advocates for businesses that can scale without significant additional investment in capital expenses.

"You want to have things that have low capital expenses, so you don't need to add new equipment, new facilities in order to expand whatever business you're in."

Alex advises on the kind of businesses that are more resilient during inflation, emphasizing those with low capital expenses that allow for growth without substantial reinvestment.

Alex's Personal Wisdom and Experiences

  • The interviewer admires Alex's wisdom and suggests that his relationship with his father and various life experiences have contributed to his perspective.
  • Alex's youth is juxtaposed with his extensive knowledge and experiences, indicating that despite his age, he has accumulated significant wisdom.

"One, your brain is really big, and two, you have a wisdom far beyond your years."

The interviewer compliments Alex's intelligence and maturity, suggesting that he possesses a unique combination of intellectual capacity and experiential wisdom.

Definition of Leverage

  • Leverage is the ratio of input to output in a system.
  • High leverage means little input yields high output; low leverage means high input yields little output.
  • Leverage is not just borrowing money; it includes anything that amplifies output per unit of effort.

"So, leverage is the difference between the inputs and outputs in a system. It's the discrepancy between what you put in and what you get out."

This quote defines leverage in terms of efficiency and productivity, emphasizing that leverage is about the relationship between what is invested and what is gained.

Types of Leverage

  • Leverage can be achieved in various forms, not limited to monetary aspects.
  • Examples of leverage include physical tools, technology, media, and systems that increase output without increasing effort proportionally.

"So anything that increases your output without per unit of effort is leverage."

This quote broadens the concept of leverage beyond financial leverage to include any tool or method that increases productivity without a corresponding increase in effort.

Applying Leverage in Business

  • Successful and wealthy individuals apply leverage more effectively than others.
  • Understanding and applying leverage is crucial for business growth and efficiency.
  • Naval Ravikant categorizes leverage into labor, capital, code, and media.

"You have leverage around labor, which is you buy other people's time."

This quote discusses labor leverage, where hiring others can free up time for more valuable tasks, illustrating the concept of leveraging human resources for efficiency.

Labor Leverage

  • Labor leverage involves outsourcing tasks to gain time for higher-value activities.
  • The concept includes evaluating the cost of hiring versus the potential income from personal high-value tasks.
  • Initially, entrepreneurs may need to work extra to afford this leverage.

"So is there something that I'm currently doing that I can pay someone else to do to gain time back and then use the excess time I have to make up the difference?"

This quote explains the practical application of labor leverage by suggesting the delegation of lower-value tasks to others to focus on higher-value tasks.

Capital Leverage

  • Capital leverage involves using other people's money to make investments.
  • This type of leverage is common in real estate and allows for profit without significant personal financial input.

"If you can raise money, leverage other people, that's the one that the mortgage brokers that are, they're more familiar with real estate guys."

This quote highlights capital leverage in the context of real estate, where using other people's money can lead to significant profits.

Code and Media as Leverage

  • Software and media are forms of leverage due to their scalability.
  • Once created, they can be used repeatedly with minimal additional cost.
  • This leverage creates disproportionate returns relative to the initial effort.

"Code is just, you write code and it takes you one time investment to get the thing to do something, and then every additional time...I get it. Almost no incremental cost."

This quote explains how software (code) offers leverage by allowing for a one-time effort to yield continuous returns without much additional cost.

Self-Leverage Through Intensity and Emotion

  • Personal motivation and emotional intensity can act as a form of self-leverage.
  • Early entrepreneurial drive can be fueled by emotions such as the desire to prove others wrong.

"I leveraged intensity. I leveraged anger."

This quote suggests that emotions like anger can be channeled into a form of leverage to drive business success, particularly in the early stages of entrepreneurship.

Leveraging Negative Emotions for Success

  • Negative emotions like anger, fear, and disappointment can be used constructively.
  • It's important to decide whether circumstances will serve you or if you will serve them.
  • You have control over how you play the hand you're dealt, not the cards themselves.
  • Moving past lamenting one's circumstances is crucial to personal growth.

"And so if the cards that you have dealt right now are anger and fear and disappointment, then you can either wallow in those or you can turn something good out of it."

This quote emphasizes the importance of using whatever emotions or circumstances one has as tools to create a better life, rather than being a victim to them.

Evolution of Personal Motivation

  • Personal motivation and the 'leverage' one uses on themselves can change over time.
  • Great figures like Michael Jordan and Tom Brady have evolved their sources of motivation to maintain success.
  • Entrepreneurs often fail to find new motivation after achieving initial goals.
  • Recognizing the loss of leverage is key to finding new sources of inspiration.

"But this notion, that's what he gets up every single day, that's the chip on his shoulder anymore, is not true. He's now playing for greatness."

This quote highlights the shift from using past slights as motivation to striving for greatness for its own sake, as exemplified by Tom Brady.

The Role of Anger and Fear

  • Anger can be a manifestation of fear.
  • A 'game day intensity' type of anger can be used daily to approach life and business.
  • Understanding the root causes of one's anger is important for personal development.

"I think that anger is typically the manifestation of fear and so when I say anger, I wasn't throwing chairs all the time or anything like that, but there was this almost like, game day intensity type anger every day to the way I approached my life and my business."

This quote discusses how anger, often rooted in fear, can be channeled into a focused intensity that drives one's approach to life and business.

Dealing with Parental Expectations

  • Parental expectations can be a powerful motivator.
  • The need to prove oneself can be driven by a parent's relentless standards.
  • Resolving these feelings involves setting and achieving personal goals that are undeniable.
  • It's possible to transition from proving something to others to exploring one's own potential.

"I wanted it to be beyond reproach. I didn't want there to be a pause or whisper or a hesitation in saying, you won."

This quote reflects the desire to achieve success to a degree that no one, not even a critical parent, can question or undermine it.

Maintaining Momentum after Success

  • Many entrepreneurs experience a motivational gap after reaching a certain level of success.
  • Finding new sources of motivation is crucial to continued success.
  • Standards, rather than goals, should be the long-term focus for personal and professional growth.

"I think that that's because you haven't had the gap. But I think you'd agree with me. Vast majority of people listening to this either have not become successful yet or get to a particular level, and they bought their time back, and then they do nothing with it."

This quote addresses the common issue of losing motivation after achieving initial success and the importance of continuously seeking growth and new challenges.

Helping Others Through Personal Growth

  • One is best equipped to help others who are in a position they once were.
  • Continuous personal growth allows one to help more people.
  • Building relationships with others who can offer guidance and support is beneficial.

"You are best equipped and capable of helping the person you used to be."

This quote conveys the idea that personal experiences equip individuals to assist others who are facing similar challenges.

The Value of Time and Experience

  • Time is a valuable resource, and the way one perceives it influences decision-making.
  • Reflecting on whether one would trade financial success for additional years of life can be telling of their values.
  • Considering the impact of the next ten years is an important aspect of long-term planning.

"Well, I play with time a lot in terms of when I think through decisions."

This quote underlines the importance of considering time as a factor in decision-making, especially when it comes to life-changing choices and their long-term effects.

Reflection on Age and Wealth

  • Alex reflects on his potential future wealth and the realization that his older self would trade all of it to be younger again.
  • This realization prompts a reevaluation of what he is sacrificing, such as time, for future wealth.
  • Alex feels that experiencing the present through the perspective of an older self can provide a renewed appreciation for the moment.

"And I know that that man looking back at me today would trade everything he has to be 32 again."

This quote emphasizes the idea that no amount of wealth can replace the value of youth and the experiences that come with it.

The Grandfather Frame and Gratitude

  • Alex introduces the concept of the "grandfather frame," a mental model used to experience gratitude.
  • He contrasts this with the "frame of the veteran," which is used to reduce stress by normalizing recurring frustrations.
  • The grandfather frame allows Alex to view his current challenges with serenity and maintain focus on what truly matters, such as helping customers rather than accumulating wealth.

"So there's something called the frame of the veteran... And so I'll tell you a short tactical story of this."

Alex explains the frame of the veteran and how it helps him to manage stress, then transitions to how the grandfather frame helps him reframe his perspective towards gratitude and focus.

Reframing Life's Challenges

  • Alex shares a personal story about his cat's death and how reframing the situation shifted his sorrow to gratitude.
  • He discusses the importance of decreasing emotional reactivity to make better decisions in the present.
  • The reframe allows him to appreciate the time he had rather than focusing on the loss.

"And so it shifted my sorrow into gratitude for just all this extra time I got to have with this little cat."

This quote illustrates how reframing a negative event into a different context can transform feelings of loss into feelings of gratitude.

Living with Gratitude and Presence

  • The unnamed speaker shares their struggle with gratitude and being present.
  • They discuss how they've built a "gratitude muscle" and the paradox of feeling more gratitude for unattained dreams than for current achievements.
  • They also reflect on the value of living in the moment and making choices that align with their current values and desires.

"And that's not cool way to live, because you're always not where you are."

This quote captures the essence of the struggle with being present and the importance of appreciating the current moment rather than always focusing on future aspirations.

Everyday Urgency Blueprint

  • Alex describes the "everyday urgency blueprint" as the necessary, repetitive work that leads to success.
  • He emphasizes the principle that "simple scales, fancy fails," advocating for simplicity in business processes.
  • Alex explains that complexity will naturally arise with scale, so it is crucial to focus on either increasing volume or value without adding unnecessary complexity.

"If it worked once, it'll work again."

This quote encapsulates the philosophy behind the everyday urgency blueprint, which is to repeat successful actions rather than constantly seeking change.

Simplicity in Scaling Business

  • Alex discusses the importance of keeping business strategies simple to facilitate scaling.
  • He suggests focusing on increasing sales volume or enhancing the value of a product to make more money.
  • The simplicity in approach acts as a "forcing function" to remove distractions and concentrate on what drives revenue.

"Simple scales, fancy fails... So thinking through the razor of simplicity creates a forcing function of you will remove all other things besides volume to the equation."

This quote reinforces the idea that maintaining simplicity is key to scaling a business effectively, by concentrating on the core drivers of revenue growth.

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