Harness the power of leverage!
The power of leverage is possibly one of the most neglected areas for the average person. However, if you look at some of the most successful people around you, one fact will always be very clear; Truly successful people fully understand the principle of leverage and use it to maximum effect in their life.
Leverage in real life works much like the “lever principle” in engineering, like using a lever to lift, move, or open an object. How does it really work in real life?
Let’s take a hypothetical example just to illustrate the power of financial leverage. Let’s make a couple of assumptions here to strengthen our case. Suppose you had inside information that ABC Company’s stock price is going to take off and climb 100% in 3 months when they announce a new key product. You also know for sure that real estate prices will go up 50% in the next 6 months. However, you only have $ 50,000 in spare cash in your bank. Where will you put your money?
When you paint this scenario for a group of people I spoke to some time ago, many of them will choose to invest their $ 50,000 in shares of ABC Company. When asked why this was the case, I received various responses such as, “With $ 50,000, I can’t afford to buy a house, so I’ll put it in stock!” or “Shares are more liquid and I’ll get my money back faster!” Almost all the time, there will be more people choosing the stock option, especially when you consider that the stock price will double in 3 months when real estate prices will only go up 50% in 6 months. And this is the case with how most people will think.
Ask a really successful person this very question and the answer will almost always be to put your $ 50,000 in real estate. So how do I buy a house with only S $ 50,000 unless I get a loan from a bank? That is exactly, take a loan from a bank, financial institution or your friend, but regardless, use the concept of OPM (other people’s money).
Here’s why. When you put the $ 50,000 in shares of ABC Company, you will get a 100% return on investment when the share price doubles in 3 months, that is, your profit is $ 50,000. However, depending on where you are, you only need to put down your $ 50,000 as a down payment for real estate. In some areas, you can make a down payment as low as 5% to 10%. Let’s conservatively assume that we use a 10% down payment. This means that your $ 50,000 could be the down payment on a $ 500,000 house. In 6 months, when the price of your real estate increases by 50%, you would have made a hefty $ 250,000 profit in just 6 months! If your down payment had been only 5%, you would have bought a $ 1 million real estate property and made a profit of $ 500,000 in just 6 months. The picture becomes much clearer when you weigh a profit of $ 50,000 in 3 months against a profit of $ 500,000 in 6 months. By investing in real estate and using the power of financial leverage, your earnings are 10 times more despite a percentage movement in the price of real estate of only half that of stocks.
Why is this so? Well the reason is that in the case of Real Estate, you have 20: 1 leverage for a 5% down payment (10: 1 if the down payment was 10%) compared to no leverage in the case of Actions. In recent decades, financial instruments such as options and margin trading have become very popular, allowing you to also take advantage of investments in selected stocks.
The above is an example of financial leverage. In everyday life, there are 4 other areas of leverage that we can take advantage of.
First, there is time leverage. In this world, we are all born with different talents. Some are smarter, some are prettier, while some are taller and some are fatter. However, there is only one thing in life that we are all born equally with and that is time. We all have 24 hours a day and approximately 40 years of working life (from 20 to 60 years). So it goes without saying that in order to be highly successful, we must seize time. A factory production line is a good example of time leverage. A worker can only have 24 hours a day. If you hire 10 workers, you basically have 240 hours a day!
The second is the use of knowledge. Successful people almost always don’t know everything. Bill Gates probably doesn’t know what goes on inside his Microsoft Windows programs. However, he has a great vision and takes advantage of the knowledge of this team of programmers to develop Microsoft Windows. Take advantage of your marketing team to market your products. There are hundreds of areas in a company that you need to know about and the job of a successful CEO is to find someone who has the knowledge that you can leverage.
Third, we must analyze the areas of technological leverage. Technology allows us to do things faster and with greater precision than ever. The computer and the word processor are a good example of taking advantage of technology. Before the advent of the word processor, documents were typed and corrections were made with correction fluid which was slow, cumbersome, and messy. The word processor changed all that and is capable of producing professional-looking documents with graphics in less than a quarter of the time of a typewriter. Product robots can assemble a car faster and with greater precision than any human being. The internet and mobile phones are changing the way we live, work and play, and we can all do so in a much more efficient way.
Last but not least, we can look at the network leverage area. There’s a saying that goes, “It’s not about who you know, it’s about who knows you.” One can never underestimate the power of networking and “sell yourself and your capabilities.” When successful people have a project on their hands and are looking for the right people to help them achieve their dreams, they will almost always choose those they know to head the top-level managers. They may not know them personally, but at least they will know the capabilities and reputations of the people they hire. Similarly, when you are successful and need to tap into the knowledge of others, you will first look at the group of people within your existing network.
This article serves to highlight the power of leverage and how it can help you achieve the same level of success as many others. Leverage requires you to go beyond your comfort zone, work with people you don’t know well, and think in ways you never thought were possible. No successful person did it without leverage. There are many skills to learn on the road to success, but if I have to choose one to be successful, the skill of leverage will be at the top of the list.