10 Operating Principles For Life
“Life is too short not to learn from the mistakes of others.”
Given how complicated life is, it’s strange that it doesn’t come with an instruction manual.
No wonder some people struggle to make the most of theirs.
It all stems from the fact that we acquire wisdom after the event when we really could have done with it beforehand.
Or, as the Danish philosopher Soren Kierkegaard once said, “Life can only be understood backwards, but it must be lived forwards.”
So what can you do to make your journey easier?
One way is to learn a set of time-honoured principles that can be applied to the different domains of your life.
They can help you make better decisions regarding your career, personal finances, health and relationships.
And better decisions lead to better outcomes.
Listed below are ten principles to get you started. Some you may already know whilst others will be new to you.
You may even have some of your own to add.
Either way, the most important thing is not just to read about them but to put them into action.
Good luck! 🍀
1. Compounding
“Play iterated games. All the returns in life, whether in wealth, relationships, or knowledge, come from compound interest.”
What is ‘Compounding’?
How often have you heard the phrase ‘the rich get richer’?
Do you know why?
The answer is to do with something called compounding.
Compounding occurs when small actions add up to something greater than the sum of their parts over time.
For example, if you put £1,000 into a savings account with 10% interest, you will have £1,100 at the end of the first year (the initial ‘principal’ of £1,000 plus £100 in interest).
However, by the end of the second year, you will have £1,210.
This figure comes from the £1,100 from the previous year plus the interest amount of £110 (10% of £1100) added on top.
In the third year, you will have £1,331 (£1,210 plus your 10% interest of £121), and the interest earned continues to compound from there.
At the end of the 10th year, you'll have a total of £2,594 (or more than double your original savings amount), all without needing to add any more money after your initial investment.
It’s like magic.
In the beginning, it won’t look like you’re making much progress, but then things start to grow exponentially.
The power of compounding is behind one of the most successful investors of all time Warren Buffet.
Known as the ‘Sage of Omaha’, this shrewd money manager accumulated a staggering 99% of his $100 billion net worth after turning 50!
Why is it helpful to know about ‘Compounding’?
Compounding is more than just the key to building wealth.
Your level of fitness, the strength of your relationships, and your depth of knowledge all benefit from compounding.
Small actions performed consistently over time will ultimately become something of great significance.
It’s helpful to understand how compounding works because your brain tends to think of growth in linear terms and not exponential.
Where can I read more about ‘Compounding’?
The Compound Effect by Darren Hardy is a great place to start. Another fantastic book is The Joys Of Compounding: The Passionate Pursuit of Lifelong Learning by Gautam Baid.
2. Leverage
“Give me a lever long enough and a place to stand, and I will move the earth.”
What is ‘Leverage?’
Leverage is the use of an existing or borrowed resource to achieve something new or better.
The most common form of leverage is a mortgage which allows you to buy an expensive asset using a bank's money.
Assuming you pay off your mortgage and your house has appreciated, you now have ownership of something you could not have bought otherwise.
Leverage comes in three main forms:
1. People
Businesses make money by leveraging their employees. Each staff member generates more revenue for the company than it costs the company in wages. For example, Apple has an income of nearly $2 million per employee but the average estimated annual salary at Apple is only $143,362.
2. Money
Businesses borrow money from banks to expand their operations, and individuals borrow money to buy homes in the form of a mortgage. Assuming the business grows and the home appreciates then the use of leverage has been successful.
3. Technology
Technology helps reduce costs by making it faster and easier to do something. The internet is an excellent example of technological leverage because it allows the creation of a business where the marginal cost is almost zero.
Why is it helpful to know about ‘Leverage?’
To achieve outsized success, you need to employ leverage. This is because there’s only so much you can achieve on your own.
For example, when it comes to earning money, your potential remuneration is limited by the maximum amount you can make hourly.
The only way to increase your earnings beyond this is by employing leverage.
Let’s say you are an experienced widget maker.
After many years of practice, you have worked out how to make 50 widgets a day. 👏
Using your enviable powers of persuasion, you’ve worked out that you can sell each widget for £10 in the local market.
This means the maximum daily revenue you can generate is £500.
However, if you employ a group of five widget makers to help you, then your total increases dramatically.
Assuming you pay them each £5 per widget (meaning their total daily wages equal £1,250 as each person receives £250), they will generate £2,500 in revenue.
Minus their wages, this leaves you with £750, which is 50% more than you made as an individual, and you didn’t have to make any widgets yourself. Clever you.
Where can I read more about ‘Leverage?’
The book Life Leverage by Rob Moore is an excellent place to start. It covers how you can apply this principle to money, business, time and more.
3. Margin of Safety
“Most investors are primarily oriented toward return, how much they can make and pay little attention to risk, how much they can lose.”
What is a ‘Margin of Safety?’
How many of your plans go precisely according to plan? The answer is probably “not many”.
This is because you are a human being which means you are bad at predicting outcomes, which means that everything always takes longer and costs more than you expect.
For this reason, it’s wise to add a ‘margin of safety’ in the form of extra time or money (or both) to your plans so that you avoid ending up in a difficult situation.
It’s a term coined by the investor Benjamin Graham (who taught our friend Warren Buffett all he knows) to ensure he didn’t lose money.
Using his valuation method, he only ever bought a stock below its intrinsic value (what it was actually worth versus what it was trading at). This approach gave him a reasonable margin of safety, allowing him to absorb the impact of miscalculations or plain bad luck.
Why is it helpful to know about the ‘Margin of Safety?’
You can apply this not just to your investing philosophy but pretty much anything else in life.
For example, when carrying out home renovations, don’t expect the project to come in on time and budget. Instead, set aside 15-20% extra.
And, when it comes to personal finances, a high savings rate gives you a margin of safety to tackle the unexpected, like a loss of employment.
Giving yourself a margin of safety is smart because the future is uncertain, and you want to have the confidence of knowing you have some room to manoeuvre.
Where can I read more about the ‘Margin of Safety?’
Although it’s specifically about investing, you can apply the lessons in the book The Intelligent Investor by Benjamin Graham more broadly.
4. Thinking from First Principles
“Think simple’ as my old master used to say - meaning reduce the whole of its parts into the simplest terms, getting back to first principles.”
What is ‘Thinking from First Principles?’
Making assumptions is a dangerous game.
This is because many things are the way they are simply because no one has questioned them.
More often than not, you can improve upon the existing ‘best practice’.
Thinking from first principles is the process of breaking something down into its individual parts and then figuring out if there’s a better way of doing it.
Why is it helpful to ‘Think from First Principles?’
Thinking from first principles allows you to make something quicker, cheaper and simpler.
A famous example occurred when Elon Musk started working on SpaceX in the early 2000s.
Initially, he tried to buy rockets from Russia but was quoted a price far above what he could afford.
This prompted Elon to think from first principles about rocket design.
He broke the spacecraft down to its component materials and worked out that it would be cheaper to buy them individually at commodity prices and then construct the rocket himself.
As a result, he reduced his manufacturing costs by a factor of ten. Oh, and he also had the opportunity to design his rocket to be reusable, further boosting his potential profits.
Where can I read more about ‘Thinking from First Principles?’
You can find a good explanation of thinking from first principles in the book Mental Models: 30 Thinking Tools that Separate the Average From the Exceptional. Improved Decision-Making, Logical Analysis, and Problem-Solving by Peter Hollins.
5. Optionality
““An option is what makes you antifragile and allows you to benefit from the positive side of uncertainty, without a corresponding serious harm from the negative side.””
What is ‘Optionality’?
‘Optionality’ is a term from the world of finance that means the right, but not the obligation, to take action.
In other words, you have the choice to do something, but you don’t have to do it.
An attractive option has a fixed downside (i.e. a limited negative impact) and a potentially unlimited upside (i.e. an unbounded positive impact).
For example, starting your own business could give you financial freedom if it goes well, and if it goes belly up, you haven’t lost much (assuming you haven’t used all your life savings).
Of course, there is such a thing as negative optionality, e.g. a meth habit or being in significant debt.
Why is it helpful to know about ‘Optionality?’
Having no options is uncomfortable as it means you have to put up with whatever your circumstances are.
Understanding the power of optionality means you can identify and take advantage of opportunities with a high probability of positive outcomes.
Your goal is to create a good calibre of options instead of keeping as many doors open as possible.
In other words, it’s less about the quantity and more about the quality.
Where can I read more about ‘Optionality?’
Optionality: How to Survive and Thrive in a Volatile World by Richard Meadows is an easy-to-read book that will help you develop a better understanding of this valuable principle.
6. Simplicity
“Simplicity is the key to brilliance.”
What is ‘Simplicity?’
Simplicity is the act of making something easy to understand or do.
This doesn’t mean achieving it is effortless.
In fact, it takes hard work to make something simple.
Sadly, people often overlook simple ideas because they appear too straightforward to be valuable.
Why is it helpful to seek ‘Simplicity?’
Although complexity can be seductive because we equate it with sophistication, it is often the course of failure.
Complex things have more moving parts, making them prone to going wrong.
On the contrary, simple things break less frequently because they have fewer elements.
They are also easier to build and repair.
Therefore, it is always a helpful exercise to look for ways to simplify things.
Where can I read more about ‘Simplicity?’
Two books worth reading on this topic are Simple Rules: How to Thrive in a Complex World by Kathleen Eisenhardt and Donald Sull and Simplicity by Edward de Bono
7. Friction
“The only things that evolve by themselves in an organization are disorder, friction and malperformance.”
What is ‘Friction?’
Human beings like to take the path of least resistance.
This is because we evolved in a scarce environment where we couldn’t afford to waste energy.
Therefore, if you want to encourage certain behaviour, you need to reduce the effort involved.
This explains why the apps you use most often are also the easiest to use, and Amazon.com uses technology like swipe to pay to make buying things as ‘frictionless’ as possible.
Why is it helpful to know about ‘Friction?’
You can use this principle to encourage good behaviour and break bad habits.
For example, you will be much more likely to exercise in the morning if you lay your workout clothes by your bed the night before.
And if you want to eat more fruit, simply put a bowl full of it on your kitchen counter.
Conversely, if you want to do less of something, make it harder (add friction) to do.
An extreme example from the world of personal finance is putting your credit card in a bowl of water and storing it in the freezer.
It’s tough to spend money on it if it’s inside a block of ice!
To improve your life, think of ways to reduce or add friction.
Where can I read more about ‘Friction?’
Friction: The Untapped Force That Can Be Your Most Powerful Advantage by Roger Dooley is a good book to learn more.
8. Via Negativa
“To attain knowledge, at things every day. To attain wisdom, subtract things every day.”
What does ‘Via Negativa’ mean?
The author Nassim Taleb describes this Latin phrase which comes from Christian theology, as follows:
“Via negativa: In theology and philosophy, the focus on what something is not, an indirect definition. In action, it is a recipe for what to avoid, what not to do—subtraction, not addition, say, in medicine.”
In other words, it is easier to make improvements in your life by subtracting the things that negatively impact it as opposed to adding something that positively impacts it.
Why is applying ‘Via Negativa’ to your life helpful?
You can dramatically improve your life by removing things.
Take the news, for example.
You can radically improve your happiness levels by not watching or reading any.
Improving your diet is another example.
Rather than only eating healthy items, you can simply eat fewer unhealthy ones.
In other words, instead of going to the effort of cooking vegetable couscous, you can just say no doughnuts.
Where can I read more about ‘Via Negativa?’
This helpful principle is discussed at length in the brilliant book Antifragile: Things that Gain from Disorder by Nassim Nicholas Taleb.
9. Long-term Thinking
“The longer you can extend your time horizon, the less competitive the game becomes because most of the world is engaged over a very short time frame.”
What is ‘Long-term Thinking?’
To think long-term means to think in terms of years and decades instead of weeks and months.
It requires short-term sacrifices for benefits occurring far in the future.
For example, during three Olympics, Usain Bolt won eight gold medals.
Despite running for less than two minutes, he earned over $100 million.
But it took him twenty years of training to get there.
Why is ‘Long-term Thinking’ helpful?
The cold, hard truth is that anything worth doing takes time.
Thinking long-term helps you keep your eye on the big picture and not get distracted by costly short-term rewards.
This is particularly valuable in a world where things like social media provide endless hits of dopamine which quickly fade.
The best prizes come to those willing to delay their gratification, which requires patience and optimism.
This is difficult because you will experience plenty of volatility in the short term, and you have to have the presence of mind to stay the course.
Just ask anyone who has started a successful business or is an accomplished investor.
They will have had plenty of despairing moments along the way.
Where can I read more about ‘Long-term Thinking?’
A good book to start with is The Long Game: How to Be a Long-Term Thinker in a Short-Term World by Dorie Clark.
10. Discipline
“The biggest generator of long term results is learning to do things when you don’t feel like doing them. Discipline is more reliable than motivation.”
What does ‘Discipline’ mean?
For most of us, the word discipline has a negative connotation.
It’s probably because it reminds us of being in trouble at school or being told off by our parents as a child.
However, the high achievers have realised that it’s the key to the thing we desire the most: our freedom.
How?
Because being disciplined in the short term brings you more freedom later on.
Why is it helpful to practice ‘Discipline?’
Take personal finance as an example.
Whilst regular saving and investing when you’re young involves discipline and sacrifice in the short term, the potential long term upside is financial freedom.
In this situation, you can choose to work if you want. This gives you more freedom over how you spend your time.
Exercise is another excellent example.
It’s hard to motivate yourself to do it, but you accrue many benefits when you do.
You sleep better, have more energy, and think more clearly. You’re also more likely to be free from illnesses.
Where can I read more about ‘Discipline?’
Discipline equals Freedom by Jocko Willink is the book you need to read as it explains this idea in more detail.
