The tenn “leverage” is heard so often in the business world that it’s become almost cliche. It most certainly is a powerful force in the momentum and direction of any deal it’s applied to. Unfortunately, most people employ leverage in a dangerous way.
Think of leverage as you think of cholesterol. There are two kinds of cholesterol –the good cholesterol, and the bad. Too much of the bad, and you’re a dead duck. Too much of the good, and it actually fights the bad. Although it’s still cholesterol, it’s good for you.
Well, there are two kinds ofleverage as well. Let me explain…
Don’t Be Fooled By The Dark Side Of Leverage
Most people use leverage like this:
In the personal arena, a person will go out and buy a house, or a car, or a boat, or whatever -and they go into debt. In the moneymaking arena, they buy or lease an asset, they buy a business, or they hire employees and put them on salary. In both cases, they create an obligation, a debt of sorts.
Then they pray and hope that that asset, that investment either makes them a lot more money every month than the cost of the debt service, or that it appreciates fast enough that they can sell it for a lot more than they have underwritten or subsidized.
If everything works out well, that kind of leverage can be profitable. But if anything goes wrong that same leverage bites you viciously in the butt. It can bring you down, and it can be your undoing.
The “Flip Side” Of Leverage Keeps You On High Ground
The kind of leverage that I deal in has infinite upside. Maybe it’s a gift, but I have always recognized that other people spend an enormous amount of time, effort, capital and activity to build, or acquire, or accumulate assets –tangible and intangible –that they don’t really take advantage of.
That’s my leverage. The investment is still there, in capital, in time … in all the elements — but it’s not my investment.