Monday, February 15, 2010

Scalable vs. Non-Scalable Time

Ben Casnocha has an excellent post from earlier this year about scalable vs. non-scalable careers. Replacing the word careers with time, time is scalable when the return on that time can vary greatly and non-scalable when the return on that time is relatively consistent. For example, an hour spent writing a blog post is scalable- it could be read by two people or a million people. Time spent exercising in non-scalable- you're the only one who can do it and benefit from it and you can only do so many push ups in an hour.

Knowledge or capital-based work is often scalable and manual work is often non-scalable. A trader could spend an hour researching an investment and end up with a 1000% return, could lose all of his investment, or if he doesn't know how to manage risk, could lose even more than he initially invested. A dentist can consistently and steadily pull one tooth per hour- he spends one hour and has one tooth pulled, no more and no less. With only twenty-four hours in a day and all else equal, which would you rather be? Many would say that they would want to be the trader because of the potential for the huge return. Issue is, the dentist's return is smaller, but guaranteed- the trader's return can be very large, but it is in no way guaranteed to be- in general there are very few huge gains and a lot of losses. A dentist and a trader living side by side with about the same net worth have likely taken very different paths to arrive at that wealth- the dentist has steadily pulled one tooth at a time for many years, but the trader likely endured huge ups and downs throughout his career. One dentist's time produces a consistent return and every dentist is capable of achieving that return. In contrast, a trader's time produces an inconsistent return, and not all traders are successful- only a very small percentage of traders are. Because of survivorship bias, you see the ones who have been successful- for each money manager whose returns land him on the cover of Fortune, there's a huge number of unsuccessful traders who've blown up. The performance of one money manager on the cover isn't representative of all money managers, but the performance of one random dentist is generally representative of all dentists.

So which one is better or worse? Like so many things, there's no absolute answer- the answer is, it depends. Pick the one that's right for you.

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There's another group of hours that aren't scalable- no matter if you are Warren Buffett with a couple billion dollars to invest or the guy moving boxes, they're unavoidable. No one can outsource sleeping, eating or exercising. Some of those non-scalable hours are really valuable, like time spent traveling, resting or with your family. It's very important to know when to take and have the confidence to take the time to do those things. If you get sick, then you have to deal with the illness, no matter who you are or what the opportunity cost of that time is.

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