LEVERAGE - How a simple word improves your wealth by 10 folds?

Updated: 5 days ago

“If you don't have leverage, you're never going to make real wealth.” - Naval Ravikant



Leverage
Leverage


We used to study Leverage in school physics class, the concept of Lever and Fulcrum to manage a load with less effort, where Lever was actually working as a force multiplier. We continuously use a lever in daily life like screwdriver to open or tighten the screw.

Leverage is popularly used in Finance for getting debt, and it is the same meaning as someone who does not have enough money borrow funds to perform tasks which required significant investment upfront as explained below from Finance industry.

Accounting and Finance Leverage Ratio = Total Debt / Total Equity. Forex, Stock & Crypto Trading Leverage = Get a loan to hold the price.

Mental Model

So, the real definition of Leverage is use (something) to get maximum advantagewhich derived from the word Lever and whole mechanism of combining Lever and Fulcrum called Leverage.

“Give me a lever long enough and a fulcrum on which to place it, and I shall move the world.” – Archimedes.

This is a very powerful quote and explains the working of the whole society, we human beings are actually using others or using some form of material possessions (tangible/intangible) used as leverage to get an advantage or benefit of some kind.

Since the beginning of humanity there were only two leverages:

  • Labour (Time)

  • Capital (Asset/Skill)

In the last 500 years, third leverage emerged:

  • Media (Paper Printing) in around 1400 BC in Italy.

Last 50 years, the third evolved and the fourth leverage has emerged which is revolutionary in nature.

  • Media (Video/Audio)

  • Code (Software)

The last two have the ability to replicate without further effort and that’s why Naval Ravikant said “In an age of infinite leverage, judgement is the most important skill.”


In the age of Infinite Leverage Judgement is important
In the age of Infinite Leverage Judgement is important

It means,


In an earlier age if a writer wants to write and publish something, he needs:

  • Writing a book (Labour Leverage example = Time)

  • Writing a book (Capital Leverage example = Paper)

  • Publishing a book (Capital Leverage example = Printing machine or Publisher Co)

  • Broadcasting a book (Capital Leverage example = Putting on Shelves and Marketing by News Media or word of mouth)

  • Getting paid for the royalty of a book (Capital Leverage example = Cash or Check from Publisher Co)

Replication is possible with the same amount of Capital required.


But now in the age of infinite leverage,

  • Writing a book (Labour Leverage example = Time)

  • Writing a book (Media/Code Leverage example = Website or Writing Platform)

  • Publishing a book (Media Leverage example = Popular Blog)

  • Broadcasting a book (Media Leverage example = Popular Blog, Twitter and Facebook)

  • Getting paid for the royalty of a book (Code Leverage example = Blog Monetization, Affiliates, Ads or Fintech)

Replication is possible without the same amount of Capital through Digital blogs / Fintech apps / YouTube Videos and can be replicated again at a fraction of the cost.

Mental Model

Due to this; metrics of success are also changed. No one is sure about their current education credentials and that’s why continuous learning and doing /trying as effort is required to be the most important meta - skill which ultimately improves Judgement.

Real-life example of using humans as Leverage when identifying arbitrage (gap)

“The one who leverages the markets is an entrepreneur. The one who leverages the mobs is a politician.” - Venkat


Finding insights of the world

“When you combine ignorance and leverage, you get some pretty interesting results.” - Warren Buffet


Leverage is the ultimate power

“Forget rich versus poor, white collar versus blue. It’s now leveraged versus unleveraged.” - Naval Ravikant


So, to improve the OUTPUT: increase the Leverage (input-to-output ratio) and keep finding multiple leverages in the life to use in your favour.


Thanks for reading...


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