Leverage and Wealth: A Simplification

I think the idea of the “Age of Leverage” is one that is incredibly important to know. Unfortunately, most people who talk about it use very abstract and pseudo-intellectual terms. I wanted to write this post to explain what leverage is, and why living in the Age of Leverage is so important.

Traditionally, work is linear. That is, with every input, you get an output in return. If I write a blog post, I get one blog post in return. If I manufacture a car, I get one car in return.

This system is fine, but what if we could change it? What if we could get 60 outputs for every input?

This idea of expanding the number of outputs per input is called leverage. The best way to introduce leverage is to use it the way it was originally defined for: financial leverage.

Let’s say we get a thousand of our own dollars, and put it into a stock. Let’s then say the stock we chose goes up 25 percent. Impressive! Let’s see our total return:

1,000*1.25 = 1,250

It looks like we’ve made a total of 250 bucks in profit. Pretty nice stuff. But what if we used leverage?

A leverage, a loan, and a debt all mean the same thing in financial terms. Essentially you’re borrowing money with the intention of paying it back in the future. But why would you want to do this? Well, let’s say that in addition to our own thousand dollars, we get an additional sixty thousand in leverage. In other words, our 1-to-1 output now becomes the 1-to-60 we talked about before. Once again, let’s assume our stock goes up 25 percent:

(1,000+60,000)*1.25 = 76,250 – 60,000 = 16,250

Our original 250 dollars of profit now becomes 15,250! This is the power of leverage. 

Of course, financial leverage isn’t all sunshine and flowers. The markets are incredibly volatile, and it’s more likely that you’ll lose 25 percent than gain it. A pretty bad situation to be in, considering you still have to pay off the debt. But what if we could apply the idea of leverage to less risky work?

After the internet revolution, we could. Let’s say I make a blog post. When it comes out, it might just get 10 views. Not great. However, as time goes on, it may grow up to get 100, or 1,000, or 10,000 views. And yet, the content has never changed. I didn’t write more posts to get more views — the views came to the same amount of input. Just like our previous example.

Where does this come to mean wealth? Well, imagine these singular inputs create enough output to generate an audience. An audience of, let’s say, 1,000. Say we decide to make a course based on what we’ve written (that’s pretty popular nowadays, right?) and price it at $250. If all of our audience buys it, that generates a profit of $250,000. It may not be realistic that all of our audience purchases the product, but that’s not the point — the point is that we turned one input (the course) into over a hundred thousand dollars.

Hopefully at this point you see why people are calling this the Age of Leverage. This power to create with very few linear costs allows us, in theory, to expand our profits beyond what could have ever been possible. And the great thing is that this isn’t limited to corporations or the 1% — you could do it, too.

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