Saturday Serendipity
Quote, Mental Model, Interesting find.
Hi!
Reading time: About 6 minutes
Quote
“Most men spend more energy coming up with excuses than if they simply found the fix to their problems.” —Leo Tolstoy
Mental Model
Leverage
Leverage comes from the word lever. Lever is the force that creates additional force or strength. Archimedes who is credited to creating the concept of leverage over 2000 years ago said that if he had a lever which was long enough and given enough distance, he could lift the Earth.
There are three types of levers:
“Levers with the fulcrum in the middle. A force is applied on one side and the load is on the other side (such as a crowbar.)
Levers where the load is placed in the middle and the force is applied on one side, with the fulcrum located on the other (such as a bottle opener.)
Levers where the force is applied in the middle (such as our lower jaw bones.)”
Farnam Street
Leverage is something we see happen every single day in life. It just goes unnoticed. It has been used since a long long time as well. The ancient Egyptians used it to move massive weights to build the pyramids. As the world has evolved and changed so has the concept of leverage. It is now present not only in moving objects but also in many other areas of life.
In Decision Making, Alan C McLucas defines leverage and leverage points as:
Leverage is built on the notion that small, well-focused actions can sometimes produce significant, enduring improvements if they are applied in the right place. Tacking a difficult problem is often a matter of seeing where the high leverage lies.
… A leverage point is where a small difference can make a large difference. Leverage points provide kernel ides and procedures for formulating solutions. Identifying leverage points helps us: create new courses of action, develop increased awareness of those things that may cause a difficult before there are any obvious signs of trouble and figure out what is causing a difficult.
Naval Ravikant on twitter gave an example of leverage in fortune building,
Fortunes require leverage. Business leverage comes from capital, people, and products with no marginal cost of replication (code and media).Capital means money. To raise money, apply your specific knowledge, with accountability, and show resulting good judgment.Labor means people working for you. It's the oldest and most fought-over form of leverage. Labor leverage will impress your parents, but don’t waste your life chasing it.Capital and labor are permissioned leverage. Everyone is chasing capital, but someone has to give it to you. Everyone is trying to lead, but someone has to follow you.Code and media are permissionless leverage. They're the leverage behind the newly rich. You can create software and media that works for you while you sleep.An army of robots is freely available - it's just packed in data centers for heat and space efficiency. Use it. If you can't code, write books and blogs, record videos and podcasts.Leverage is a force multiplier for your judgement.
Leverage needs to be used correctly. As Naval said if you leverage your skills such as writing, public speaking, etc. to the public you can get unimaginable returns without actually putting in that much effort. You just need to know that the permissioned leverage can be useless and put you at risk of the unknown.
In Negotiation
What happens when we get our stuff fixed by experts?
For example, I had to go to get my phone repaired because the screen malfunctioned. The shopkeeper looked at the damage and said that the cost will be Rs500 to check what has malfunctioned. After checking the malfunction, the shopkeeper quotes a price of Rs5000 to repair the phone saying the display is gone and the screen needs to be replaced.
In this case, you have no leverage. The person repairing your phone knows everything(he has the leverage) .You don’t have an option but to agree on his price. The only thing you can do is go to another person to repair. But the other person might quote even higher. You never know. Plus because it is something like a phone, you do not want it to be repaired in some random shop where the chances of it working again are slim.
Roger Volkema wrote this on the key principles of leverage:
1. Leverage is based on perceptions. If a party to a negotiation has an advantage and nobody perceives that the advantage exists…there is no leverage. This is especially true for the party with the disadvantage…Thus, it is perceived cost, real or imaginary that enables leverage.
2. Leverage is dynamic. Leverage can change as quickly as new information becomes available…These sorts of changes occur during formal business negotiations as well. If, for example, information central to an upcoming bidding process known only to one company becomes available to the other company, then leverage among companies has shifted.
3. Leverage is situation specific…The aforementioned company with privileged information might have an advantage over another company, but in another situation, the advantage could be reversed (for example, the second company has just made a technical breakthrough the will revolutionize the industry.) Sometimes the situations that create leverage overlap or can be linked in some way.
4. Leverage is a social or relational construct. Therefore, one has advantage over another individual only as long as the relationship exists. If one part leaves the relationship…leverage ceases to exist…Without another party, it is like being on a seesaw by yourself.
For me there is a clear winner to show how to use leverage in negotiations. Those are the Indian Moms. They are in their prime while bargaining. They make the shopkeeper feel like their product means absolutely nothing to them. They act like they are doing a favour by buying their product and then use pricing tactics. Say a number so low compared to what the asking price is that the shopkeeper meets at a price midway which is ridiculously cheap.
I think negotiations should be taught by all the moms.
In Investing
In Investing leverage can come through sources like borrowing capital, learning the right concepts, etc.
For me it is similar to fortune building. Borrowing capital is very dangerous when investing. We cannot leverage other peoples/institutions money when we are exposed to a huge market of randomness.
Using leverage when it comes to capital is the most dangerous thing one can do. This is because the odds of you being right can be high but the chances of you being right and at the same time surviving the extremely bad periods while being indebted is almost impossible.
Rick Guerin, a friend of Buffet and Munger got wiped out because of leverage. He had to sell his Berkshire shares to Warren for $40. It is worth $500,000 now.
Similarly LTCM. The smartest people who had a ‘winning strategy’ lost out (went bankrupt) because they used leverage.
On the other hand leveraging all the knowledge that you have accumulated to make the right decisions and then creating a feedback loop by sharing what you have learnt through content creation or teaching classes can be of great help.
Buffett and Munger have leveraged everything that they learnt to become the best business duo the world has seen.
Resources:
Interesting find
That’s it.
Thank you for reading. Enjoy your weekend!
Samvit.