For this week’s publication, I’m excited to share a written piece from one of the smartest and dynamic minds I know. Hailing from North Weezy, Damon is a Private Equity Investment Professional by day and a dope skier among many other things. Today he drops some fire for us on the topic of Leverage and how we can all make use of it, pay attention!
Leverage in the Playground
Different ways to amplify returns
We’ve all heard the statement “you’ll never get rich renting out your time”, but how can we take steps in the other direction? I recently read (and highly recommend) the Almanack of Navikant. There is a free PDF available in that link. Pulling together various blog posts, the book lays out a framework for generating wealth and happiness. Focusing on the money side, Navikant hypothesizes that you need to employ leverage if you want to accelerate the generation of wealth.
But what exactly is leverage?
Exploring Leverage
In basic terms, leverage is anything which amplifies your efforts. The above levers, they provide physical leverage. Writing a sales manual so that your employees can best sell your goods, that leverages your knowledge. Hitting send on an email and it going to hundreds or thousands of recipients, that’s leverage too (there’s no marginal cost of adding another recipient). Ok, fine. But what about the money thing? Navikant lays out three ways of using leverage to generate wealth (ordered by increasing importance):
Labour (“people” leverage)
Capital (“financial” leverage)
Products with no marginal cost of replication/production (“internet technology” leverage)
Many of us in the investment space will be familiar with financial leverage. If you are assessing an investment opportunity and have decided to commit capital, you could use more capital and increase the output of that same decision. Not just debt, equity too. You’ll need to raise the funds of course, but investment decisions scale very well. This attracts a lot of people into the industry. But it’s not all reward with no risk. There is downside too.
There’s enough information out there on the risks of debt leverage so I won’t go through the basics. Debt leverage can wipe you out. Committing more capital to an investment (debt or equity) increases the potential for loss. So how do we get around this? It’s quite simple: know what you’re doing as best you can and position yourself optimally. Do the work so that you best understand the risk and then make an informed decision. That’s why hedge funds and private equity firms, deep users of financial leverage, focus aggressively on having the best people and processes. What about the other sources of leverage?
Lessons From The Playground
People leverage is seen as being the least desirable. Don’t get me wrong, getting paid for someone else doing work for you is great. You can generate wealth. But it’s messy. Economics teaches us about the Principal-Agent problem. No one is going to be as motivated as you are to deliver for your business/idea. Which takes me back to my years trying to make it by selling crisps, drinks, and donuts in the playground at school.
Once promoted to the high-flying status of “Year 9”, which meant that you were the kings of the Year 7 to 9 playground, managing employees became feasible. Owning an in-demand scarce product (junk food) created the opportunity. And with opportunity came enterprising employees (Year 7 and 8s), who helped you cover more ground during break time. Some days were good. A £3 investment (3x10 bags of crisps from Poundland) could be flipped into £15. You could profit handsomely and split the pie. Efforts were amplified. But it wasn’t sustainable. The agent wasn’t as invested as the principal. They often got caught by a teacher, didn’t deliver on making sales, or got hustled. People leverage is messy…
I’m not an expert on internet tech so I’ll leave that to those who are more qualified. Just keep an eye out on ways you can leverage your knowledge with internet tools. You can make a healthy profit margin if you create something unique, in demand, and which can be reproduced with no marginal cost (think software or media).
Closing Thoughts
With that context, here are a few ways to think about leverage in your life:
Look for leverage in everything you do and position yourself to make the most of that leverage
Have great habits and processes. I think of these as leverage for the mind. Our willpower is limited. You won’t have energy to focus on what actually matters if you’re wasting energy doing basic thinking
Become exceptional with people. Whilst not the best form of leverage, you’ll need to interact with people to achieve your goals. Optimize accordingly
Don’t forget: the potential of reward (almost) always comes with risks. Mitigate this by being an expert on your subject so that you can best assess the risk/reward profile
Lastly, make sure that you have staying power for the long term. Warren Buffett made over 95% of his wealth after the age of 65. You are going to need to stay committed for the long term if you want to generate real wealth (and anything else meaningful for that matter)
If this resonated with you, drop us a note via Nizzynomics and keep an eye out for more.
Wishing you all a healthy (and levered) 2021.
Free Publications - Coming Up:
[ 9th Jan 2020 ] Clubhouse: What’s in Your Portfolio? @ 11am
[ 16th Jan 2020 ] Cryptocurrency Deep Dive
[ 23rd Jan 2020 ] Pensions, Should We Care?
[ 30th Jan 2020 ] Losing Money - How to Cope
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