The Importance Of Deep Derivative Thinking To Build Greater Wealth


The importance of deep derivative thinking to build wealthMost people are leaving a ton of money on the table because they aren’t taking time out for deep thought. The people with a Financial Samurai mindset think in derivatives to maximize their financial situation, while those without just see the outcome for what it is and nothing more.

Let me explain with two examples. Remember, this is a personal finance site that emphasizes financial optimization. 

The Ousting Of A CEO

If you’ve been following the Uber story like I have, you’ll realize that everybody from the mass media to social media is talking about how one blog post by Susan Fowler, a female engineer took down their CEO along with several other high-level executives. See below at the number of Uber executive departures this year:

The number of Uber executives out after Susan Fowler's post

Travis is no longer CEO as of 6/20/2017

While the story of how one woman can make a difference is an empowering one for those unfairly treated in the workplace, I couldn’t help but wonder why nobody discussed the implications for individuals after such a move.

What happens to those who speak out? How can one benefit from speaking out without risking their own reputation? How can one who speaks out not only help other people but also extract maximum financial value from a bad situation? 

Publicly damning your managers who mistreated you can be seen as a noble cause for those who are too fearful to speak up. But the key derivative of writing a tell-all blog post is the TERROR you bring to your managers and HR if they don’t immediately address your concerns and take care of you via a generous severance package when you’ve had enough.

Employees have the most power to ruin a company’s reputation now than in any time in history. A reputation takes a lifetime to build, but a moment to destroy. The last person you want to mess with is someone with a powerful online platform who is not dependent on anybody to make ends meet. This person will bury you 10 feet in the ground if you cross her! Yet, Susan still needs a job and was successfully able to completely obliterate management.

Don’t you think Uber would have gladly settled with Susan for a cool million or ten million if she kept her allegations off a public stage? Of course they would have. Susan could have settled, and still told all her friends what a terrible experience she had. Freedom of speech is an undeniable right. Uber probably spent more on hiring a couple law firms to conduct the extensive investigation alone. Further, Uber could have easily lost $7B off its $70B private market valuation since Susan’s post went out.

Plenty of executives leave with multi-million dollar severance packages for helping drive their companies into the ground. Why can’t you and I walk away with tens of thousands or even hundreds of thousands in severance as well? Yet nobody in the media put this derivative conclusion together.

If you have a job, think about what this rising trend of tell-all blog posts can do for your career and financial bottom line. If you are being mistreated at work, know that you’re building credits for a potentially massive settlement. Document everything, just like how HR documents any perceived transgressions to protect themselves. Plant your flag online already.

True power is NEVER having to put up with dirtbags at work because you don’t have to work any more. This is one reason why money is important.

Transportation Derivative

Uber is a game changer for transportation because it has drastically lowered the cost of getting anywhere by car. For example, it used to cost $28 to go from the west side of San Francisco to downtown. Now it costs anywhere from $3 – $9 using Uber pool.

Since Uber has raised roughly $12 billion in funding to subsidize riders and drivers, the obvious course of action is to take an Uber instead of a taxi to save money, drive for Uber to make side income (not worth it anymore), and start a website to earn driver referral income. Normal folks like you and me couldn’t invest in Uber during the early rounds because most rounds were invite only. Therefore, we’ve always got to be thinking of doing the next best thing.

But if you spent time thinking beyond the obvious actions, there is one HUGE derivative implication that can make regular folks a lot more money in every major city. Think about how cheaper transportation costs can change the demand dynamics in real estate.

We all know that if a new subway station gets announced in an area, demand for housing and pricing there will rise. Therefore, the derivative thought is to assume that Uber’s ubiquity should bode well for cheaper neighborhoods that are farther away from work centers. Suddenly, the cost and time involved living farther away from work no longer matters as much.

Since Uber really began to take off circa 2013, we’ve indeed seen a faster appreciation of property prices in lower cost neighborhoods. What has driven the San Francisco single family home median high to a record $1.5M is not the established neighborhoods closer to downtown where prices are softening (D7), but the least expensive neighborhoods out west nearer the ocean (D2). Take a look at the chart below that gives some indication of the level of demand in various neighborhoods.

The hottest neighborhood is now the West Side (D2) as cheaper transportation helps boost values

Related: How To Get Rich: Practice Predicting The Future

Take The Time To Think DEEPLY

For every action, there is an unintended consequence. The classic example is raising the minimum wage so high that it drastically reduces demand for minimum wage workers. The intention is to help more people make a livable wage, but the end result might devastate a demographic. Perhaps investing in McDonald’s is a good idea since they cater to a lower income demographic and are going to automate everything. Oops, McDonald’s stock is already at a record high.

The second classic example is implementing rent control, which artificially limits the supply of homes and pushes rents higher for everyone else as a result. The only people who benefit are landlords and the dwindling percentage of people with rent controlled apartments. Perhaps investing in heartland cities without rent control is the logical conclusion.

You might be thinking that it’s too hard to think in derivatives and then take action. Yes, it’s harder than trying to be a minimalist that’s for sure. But all you’ve got to do is allocate some TIME to yourself to think deeply about the events that are happening in the world to find money making opportunities.

What are some derivative ideas you have in mind for what’s happening today? What are you seeing the most people are not seeing?