The Lonely Only
I’m a big boy now. We are so proud when we can do things for ourselves. It’s almost the main focus of growing up and becoming an adult. While doing things for ourselves is great, we sometimes confuse it with doing things by ourselves. What if it’s this solo mindset that is keeping us success in everything?
The Dirt: I can do it all by myself
Can you really do it all by yourself? Sure you can, but what if doing so makes it exponentially more difficult to win? In a world where we are leveraging or being leveraged, it’s hard to imagine anyone on an island, isolated from all aspects of society. It takes help from all sides for us to ahead in life and any thoughts to contrary may be contrary to success. Just consider that the moment we use a bicycle, can opener, shovel, or even our legs, we are leveraging. At a base level, leveraging is defined as using something to maximize advantage. This means you can move, build, and grow things that would otherwise take much longer, if not be completely impossible. It’s using one to create many.
There are two basic things we can leverage. We can leverage people or we can leverage money. Leveraging people happens all the time in business. Just to be clear, we’re not leveraging the person like a shovel or can opener, rather we are leveraging their time. We’re simply putting more hours in our day. The leveraging of money is called investing and it’s necessary to obtain significant wealth.
Taking a look at leverage, we can explore the multiplication factor of using one to create many. Here we see a direct application of our times table from school in the real world. It’s the concept of compound interest that makes us millionaires without us having to save a million dollars. It’s also paying $20k today for a $200k home, leveraging the bank’s money short-term so that the bank can leverage us long-term.
Let’s consider the performance, endurance, and longevity of a car with and without a transmission. For our purposes, imagine that a transmission is pure and simple a leverage machine. It converts the rotational speed of the engine into speed at the wheels with a particular amount of leverage. Let’s assume that if the transmission has a 10:1 ratio, the wheels turn 10 times faster than the engine, for 10:1 leverage. A car without a transmission will turn the wheels at a more basic ratio, let’s assume 1:1.
What does this mean? For the transmission-less car to double its speed, the engine must turn twice as fast. That is twice the fuel consumption and twice the wear for twice the speed. With a transmission at a 10:1 ratio, for the car to double its speed, the engine would only need to turn 10% faster, or a tenth the fuel consumption and a tenth the wear for twice the speed. How do you suppose this will play out long-term? Which car will have the better performance and endurance? Now replace the car with anything in life: Job, Money, Time, etc. Which are being leveraged and which are at par or below? Which can be leveraged even more?
Like a car, it’s okay and sometimes necessary to start in a low gear with low leverage. Eventually, if you want to go anywhere significant, we must upshift into a higher gear at some point. If we do not, we are left with wearing out, running out of gas, or not getting very far.
When was the last time you upshifted anything in your life to a higher gear, one with more leverage, to multiply your results?
For completeness, we should discuss the flip side of leverage. We may have a car with a 1:10 ratio, where the engine turns ten times faster than the wheels. This is of course ridiculous for practical purposes. Before we chuckle and move on though, consider a typical car loan. Let’s assume we buy a new $40k car with $5k down, the remainder financed at 7% for 5 years. Typical depreciation by the end of the loan will leave us with a car worth about 20% of original value. We paid $46k for what is now worth $8k. I’ll leave the judgement on worth to you, though between you and the bank, who’s leveraging who? Can you imagine any way to shift it in your favor?
Banks are notorious for using leverage in their favor and sometimes to the extreme disfavor of everyone else – remember 2008? In our fractional reserve system, banks are only required to have a fraction of what they lend out in the form of deposits. In a 10% reserve system, for example, with every dollar a bank has, they may loan 10 dollars to their customers. That’s an incredible use of leverage, would you agree?
The good news is that in order to lend more money, a bank needs to secure more deposits, right? This would at least keep a measure of solvency should you decide to take your money out of the bank. What if the answer were yes and no?
Each time the bank lends you money, they credit your account with that dollar amount. Fantastic, you say, admiring your satisfied checkbook. Did you see though that the bank just created new money? They didn’t give you money they had, they gave you money they didn’t have per fractional reserve requirements. So they effectively created more deposits, allowing them to lend even more money.
As all things must balance, at the same time as they were stuffing your bank with new cash, they were creating a new debt for you to take along with you, almost like a lead ball in your pocketbook. One more time. The bank creates new money for you. You carry the debt ball for the bank. At some point in the future, you must return more money than you borrowed to have the ball removed. If you do pay off the loan, the bank makes money in the form of interest. If you don’t, the bank gets a write-off for losing money that never existed in the first place.
While I’m not suggesting you start you own bank, what if you could play a game that you couldn’t lose? In other words, would you rather be leveraged by putting money in the bank or leverage your money by putting it where the bank puts its money? With a small amount of thought, this concept can apply to any other industry.
How can the likes of Bill Gates, LeBron James, Will Smith, even Donald Trump have 24 hours in their day just like us, yet have such amazing results unlike us? Are they superhuman, or could they have possibly mastered the game of leverage? The joke amongst the mediocre is discussing what they would do if there were just one more hour in the day. Albeit a sad joke, what if indeed you had an extra hour? What about 10 or even 100 extra hours in your day? How much more could you get done, how much more money could you earn, and how much more time could you spend with family?
The fallacy that entraps us is believing that the likes of Bill Gates must make more money per hour than us instead of considering the other side of the equation. By the way, such a belief would indicate Mr. Gates is worth about 56,000 times more per hour than we are. I don’t doubt that he’s very intelligent, ultra-savvy, and just an overall great guy, but 56,000 times greater? Really? What if instead of being a demi-god, he effectively had more hours in his day? Microsoft has roughly 124,000 employees. If we assume he’s worth only 3x our average wage, he would just have to benefit from leveraging an hour per day from each employee that is working to build his company. Is that more or less plausible than him being some false idol? This may be a very simplistic view, but does it really need to be complicated?
We marvel at the self-made millionaire, awestruck at their amazing success in life. Not to take a thing away from their personal sacrifice, work ethic, and passion, how many would tell you that they accomplished what they accomplished completely by themselves? How many would say they didn’t have a single influence, mentor, customer, or infrastructure that allowed, aided, or was instrumental in their success? The point here is that leverage is everywhere and it our choice to use it or ignore it.
At the end of the day, you are either leveraging or being leveraged. Most people are leveraged. They and their assets are used for the benefit of others. Their jobs leverage them to create shareholder equity. Their banks leverage them by offering 1% on a savings account while giving them back the same dollar on a 24% credit card loan. Social media leverages them to create content that draw more visitors, creating more ad revenue.
The good news is that we can learn to leverage. I’m not suggesting that we should never be leveraged. But imagine if we can be the one leveraging as well? If nothing else, watch those that leverage and learn. After all, couldn’t we also be the boss (of our own business), give out the loan (investment), and create a social media following (instead of being a follower)? Done properly, you can’t stop it. Like a perpetual motion machine. This is the creation of independence. When what you grow is bigger than what you take, you are free to choose anything you wish.
“The hours that ordinary people waste, extraordinary people leverage.”
I appreciate each of you. Please share this with 4 of your most leveraged friends. It just might save their life. Meet you at the top, cause the bottom’s way too crowded.