The Most Comprehensive Guide to Understanding LEVERAGE
In my last post, I explained how to know where you are in your personal finance so that you know what lies ahead of you. It is the best introduction to personal finance and you can read it here.
Today, we’ll talk about a more important concept: leverage
Leverage teaches you that wealth is not just about hard work. Else everybody would be rich. Leverage teaches impact. But perhaps a more important significance of leverage is freedom. Some things come at too great a cost they’re just not worth it in the end. Not with leverage. Leverage helps you enjoy the process.
Alex Hormozi puts it this way:
Everyone works hard to get to the top. Work ethic is the price of admission. The difference in success comes from something else: Leverage.
So what is leverage?
Whether in Physics or in life, leverage lets you do more work at a reduced amount of effort. Leverage is a multiplier of effort.
Can you lift 800 pounds? You could with an 18-foot lever.
Here’s the idea: you are not applying your effort directly on the task, you are applying it on something that does the task, amplifies your effort, and increases output. Success lies in figuring out that thing.
The Math: It’s all About Your “Output”
Normally, result (or output) is a ratio of what you put in to what needs to be done. That is: Effort/Volume of work = Result.
If your job requires 80 units of work, and you put in 80 units of effort, then your result is 1. If you double your effort, your result becomes 2 (160/80 = 2). The more your effort, the more your result.
Now with leverage as a multiplier of effort, the equation becomes:
Effort/Volume of work * leverage = Result.
So, just putting in a modest effort of 60 with a leverage of 4 gives you:
60/80 * 4 = 3.
(This ordinarily, would have required you to triple down on your efforts. Whew!)
The beautiful thing is:
while your effort is limited, leverage is unlimited.
There is a limit to what you can do (due to limitations in your energy and time), but there is no limit to the leverage you can acquire.
So leverage is greater than effort.
And the world doesn’t care about your effort, it cares about your output.
So which leverage is right for you?
To answer this, you must know the different classes of leverage. Basically, there are three types of leverage:
- Labour
- Capital
- and Products that require no extra cost to replicate (code and media)
> Labour leverage is getting people to work for you. It is earning directly from other people’s time and effort. This is most people’s view of leverage and it is the oldest, most pursued form of leverage.
Labour leverage is known as permissioned leverage because for you to lead, somebody has to be willing to follow you. You have to appeal to their interest. Having numerous people working for you will impress your parents but you shouldn’t waste your life pursuing it. Managing people is HARD and smart people today prefer to work with a small, motivated team.
> Capital leverage involves having your money work for you. Think venture capital and investment. Can you make an extra $50,000 a year without working a day? You could with $1,000,000 invested rightly.
Capital scales effort, ideas, and decisions. And capital leverage is also permissioned leverage; because for you to have money to scale your effort, you will most likely rely on someone to give it to you.
> The last form of leverage is CODE and MEDIA. These are products which require no marginal cost to replicate; products which you create once that can be sold continuously over time. Products like software, books, and courses.
Media began over 200 years ago, morphed into newspapers and mails, and has since evolved into the internet. Individuals and businesses leverage media to scale their solution and appeal to a wider group of people. And it’s not stopping soon. With the internet today, you only need a computer, a will, and an idea to begin.
The beauty of the world today is that:
You can go out on the internet, you can find your audience, and you can build a business, and create a product, and build wealth. — Naval
Product leverage is a permissionless leverage as it allows you to scale your effort without depending on other humans. And with code and media, you have an army of tireless computers working for you every minute.
This circles back to our previous question: which leverage is right for you?
I think all of it. Depending on the stage you are right now. Most wealthy people combine a lethal dose of the three classes of leverage.
But if you have no resource, leveraging media (the internet) or code to sell a product or idea may be your best shot at wealth.
Integrating Accountability
The discussion on leverage will not be complete without mentioning one key idea: accountability. This means ownership; stepping up to the risk of success or failure.
Whether through labor or capital or scaleable products, leverage demands that you step up and take risks; that you do this under your name; that you bear the responsibility for success or failure; and that you become obsessed with mastery.
The more accountable you are, the more leverage you have.
In summary, to get rich, you need leverage. Because leverage is a multiplier of effort. This comes from labour, capital, or through code or media. Code or media may be your best chance to begin because it is permissionless…
…and through this process, you need accountability.
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Reference: “How to Get Rich Without Getting Lucky” by Naval Ravikant; “The Almanac of Naval Ravikant” by Eric Jorgensen; Alex Hormozi’s Tweets; Random internet people, and One noisy, standing fan.
