The Leverage Equation Read online

  I brought in a user experience expert to redesign the website so it featured the courses and books, and I even leveraged my personal wealth back into the business to pay the bills while the income lagged during the transition from service to product revenue.

  In short, I achieved what was impossible to accomplish alone by overcoming every obstacle to my goals through multiple types of leverage – time, experience, systems, communications, marketing, and financial leverage.

  Every obstacle that stood between me and my goals was solved with leverage; and every constraint that limited growth was overcome with leverage.

  Now there’s an entire team of experts behind me that implement technology, programming, business systems, sales systems, admin systems, SEO, editing, product development, copywriting, and much more. In fact, I’m employing every form of leverage that you’ll learn about in this book, and you could do the same.

  My financial education business wouldn’t exist without leverage, and my wealth wouldn’t exist without leverage.

  Leverage is how I get more done with less of my own resources, and you can learn to do the same.

  THE REAL REASON YOU’RE NOT AS RICH AS YOU SHOULD BE…

  I share the example of my business to demonstrate a critically important point about leverage illustrated by the following question:

  What is limiting your financial growth and profits so you’re not making as much as you could right now?

  Not enough customers?

  A lousy boss?

  Not enough time?

  Not enough knowledge?

  Need another degree or credential?

  Ask 20 people this question, and you’ll get 20 different answers, but what’s interesting is that nearly all the answers look in the wrong direction. They focus on maximizing potential income, but the real problem is eliminating obstacles.

  In other words, your fastest path to forward momentum is to identify the constraints to your success and remove them. This is a key principle.

  In the online business example, my constraints to growth included all aspects of content marketing and product development. I could develop the greatest products in the world, but I would still fail without targeted traffic generated through content marketing, or without the technology to scale the business through systems.

  Conversely, I could develop amazing content marketing, driving hungry hordes of targeted traffic, but lack of any products to sell would be the limiting constraint in the business.

  The point is that every business and personal wealth plan is limited by unique constraints, or bottlenecks, to growth. Your fastest path to improved results is to identify those constraints and use leverage to overcome them.

  Changing the example to real estate, imagine that you ran across an amazing deal on an apartment building through a friend of a friend, and it’s only because of this personal connection (network leverage) that you have first crack at it. The only problem is that you have no money for the down payment (constraint) and you have credit problems (constraint).

  In that situation, most people would assume that they couldn’t buy the building, so they’d miss out on the deal. But after reading this book, you’ll know how to leverage other people’s money and credit to overcome whatever constraints you face so you can harvest that kind of opportunity.

  The point is to develop a two-pronged attack when pursuing success. You still want to set goals and move forward to maximize your potential, as is commonly taught in success literature, but it’s actually more important to turn the analysis upside down and focus your attention not on where you want to go, but on what holds you back from getting there.

  The key is to identify whatever aspect of the business is the weakest. If you have a great product but need marketing, then leverage solutions to overcome that constraint. Conversely, if you have great marketing but lack product to monetize with, then leverage your way to that solution. Whatever aspect of the business is the constraint to growth can be solved through leverage.

  This distinction is critically important because it completely changes what actions you’ll take and the results you’ll produce. Your constraints identify your key leverage points for accelerating your wealth growth. Stated another way, leverage is the quickest, most direct path to overcoming your constraints.

  For example, let’s assume one of your financial goals is to buy five positive cash flow 4-plex apartment buildings over the next two years. The typical approach would be to learn about real estate investing so you can figure out how to accomplish your goal. That’s the forward-looking process, and there’s nothing wrong with that approach except that it’s not the most efficient way to produce results.

  The reason is that as you continue, you’ll come face-to-face with your key constraints – you need the cash for the down-payments, and you need quality deal flow. It doesn’t matter how much you drive your plan forward, because without those two resources you won’t achieve your goal. They are the key constraints to your plan, and not coincidentally, the solution is leverage. You can leverage other people’s money for the down-payments and other people’s networks to access deal flow.

  The point is that constraints are your quickest path to improving results, and the way you overcome your constraints is through leverage.

  YOU DON’T NEED TO BE SMART, OR CREATIVE, OR HAVE A BIG NETWORK TO DO THIS

  Let’s look at another example to make this leverage strategy clear.

  Success in business requires that you have some, if not all, of these characteristics:

  Intelligence

  Expertise

  Talent

  Knowledge

  A strong network

  Your success can also be impacted by how much money you have, your personality, your experience, and your creativity.

  But what if none of these were actually required?

  Each of the listed traits will contribute to your potential for success, but they absolutely, positively won’t determine your success. There’s a huge gap between potential for success and actual success.

  The key idea is: if you’re lacking in any of these valid contributors, it’s a constraint that can hold you back. It’s the same principle as in the previous example, except that you’re now applying it to your personal skillset rather than the characteristics of your business.

  The problem with personal constraints is: they force you to work harder than necessary to grow less than your potential. They act like boat anchors holding you down.

  But the good news is that your constraint problems are all solvable because leverage is how you break free of your personal constraints. It’s how you grow beyond your own limitations.

  That point is so important that it merits repeating: leverage is how you break free of the personal constraints that hold you back because it gives you access to all the resources and skills that you lack. Think about this for a moment because it has enormous implications for your life and your wealth.

  The fact is: you could be missing most of these personal characteristics that lead to success and still be wildly successful, because all of them can be put to work for your benefit using leverage. It’s a tremendously freeing concept.

  And best of all, leverage is not some arcane secret-of-the-rich, and there’s nothing stopping you from using it right now (except, of course, yourself). It’s straightforward once you understand how it works. Whatever you don’t know or can’t do, somebody else knows more or can do it better than you. Whatever resources you lack, somebody else has.

  4 THINGS YOU THINK YOU KNOW THAT JUST AIN’T SO!

  Imagine you’ve been struggling to get your new business off the ground, but good news is on the horizon. All your hard work is about to pay off because a large national media company is going to publish a glowing review of your product. All of that media exposure (marketing leverage) is sure to lead to a surge in sales.

  That’s when most business owners would get scared…

  How is my existing staff going
to handle the onslaught of new orders?

  Can I train them in time?

  What happens if I incur all the training and employee expenses, but the orders don’t materialize as planned? How much will I lose?

  How much product will I need?

  How will I pay for all that inventory before the expected sales?

  While the opportunity excites you, as the business owner you’re also scared. You’ll have to make some big bets and incur some huge risks. A lot can go wrong, and every potential mistake could be expensive.

  Fortunately, you’re a master of leverage, so you’ve planned for this moment from the day you began building your business. You designed your company with scalability in mind, and you developed leveraged growth strategies that manage all those risks.

  Because of your savvy planning, the manufacturing company that provides your product has plenty of additional capacity for you to leverage and has agreed to give you 90-day payment terms (financial leverage) during your expansion phase – because they stand to benefit from your growth as well. In addition, you completely automated your order processing (systems leverage) to prepare for this moment, so it will fully scale at volume with no increase in cost; and you sub-contracted (leveraged) all product fulfillment to a large fulfillment warehouse specializing in that service. They charge on a per-unit basis with declining unit costs as the volume of sales increases, and they have plenty of extra capacity to scale with the increased order flow. In addition, all communications for the entire product cycle, from manufacturing through order placement to fulfillment, and all the way through customer activation, are completely automated and systemized (systems leverage), so they scale automatically without increased cost.

  In short, you prepared for this moment from the day you began building your business by integrating smart leverage strategies (that control risk and increase profits) into every aspect of the business. So you don’t have to risk the family farm to scale up for your big media appearance. Oprah Winfrey could call tomorrow, and you’d be ready for the volume, and if Oprah never calls, you’d still operate safely and efficiently. Heads you win; tails you win.

  This is an example of how leverage can be used to make more while risking less. It’s not fiction; it’s power. But like all tools of power, some will use it wisely, others will abuse it, and still others will fear it.

  That’s because leverage is something of a loaded term that can cause an emotional response in people due to common misunderstandings about how it works. Here are some examples of misconceptions and myths about leverage:

  Leverage should only be utilized by investors with the highest risk tolerance.

  If you leverage a person’s skill or time, you’re using them.

  Leverage strategies are difficult or expensive to implement.

  The loss potential is infinite.

  The only form of leverage that inherently increases risk is financial leverage. It’s the only type of leverage that always cuts both ways, making the good times great and the bad times unbearable. Financial leverage is the one strategy you have to be very careful with.

  All other forms of leverage – time, technology, marketing, network, or experience – can actually increase results while reducing risk at the same time. When used properly, they can give you the best of both worlds.

  WALKING THE TALK

  I’m not just theorizing about the idea of leverage. I built my career around this concept, and for two decades I’ve coached clients to do the same – because it works.

  My career experience has spanned three distinct stages, each tightly correlated to leverage. I started my career as a hedge fund investment manager in paper assets, and then became a real estate investor in large apartment buildings and tax liens, and now I’m an infopreneur teaching through online courses and books.

  Why did I pick hedge fund investment management over the more obvious choice of becoming a traditional financial advisor? Probably 999 out of 1000 people pursuing a financial career straight out of college would have chosen the latter, but I chose the former.

  Why did I pick large apartment buildings and tax liens for my real estate investing rather than the much easier single family homes? Again, probably 999 out of 1000 people starting into real estate would have chosen the latter.

  And why did I pick online courses and books for my financial education business at https://financialmentor.com rather than giving seminars or teaching in a University setting?

  The answer in every case boils down to one word – leverage. I’ve always chosen high-leverage business models over the low-leverage alternatives, even when the high-leverage choice was less common and much more difficult. Each choice was a conscious, pro-active decision to pursue more leverage, rather than less.

  High-leverage business has the potential for far greater success. When you get it right, profits can grow geometrically because it’s baked into the cake of the underlying characteristics of each business. Whereas low-leverage businesses are inherently limited by your personal resources, so they can never scale into something substantial.

  The high potential payoff of the leveraged alternative justifies risking my time; whereas the low potential payoff of the unleveraged alternative isn’t worth paying the price of my (or your) scarcest resource – time.

  IN SUMMARY

  Leverage is simply another tool that you’re going to master so you can strategically employ it in your wealth plan in order to overcome the constraints that limit your growth. It’s not inherently good or bad; it’s just a tool that allows you to impact your world and develop your financial potential in a more effective manner.

  Leverage doesn’t inherently increase risk (unless it’s financial leverage), but it does increase results, and that’s why it’s an essential tool for you to include in your wealth plan.

  PRINCIPLES:

  THE 9 PRINCIPLES OF LEVERAGE

  THE TOP 9 PRINCIPLES FOR MASTERING LEVERAGE IN RECORD TIME

  The shortest and surest way of arriving at real knowledge is to unlearn the lessons we have been taught, to mount the first principles, and take nobody’s word about them.

  —Henry Bolingbroke

  Now that you know what leverage is, and why nobody gets rich without it, the next step is to uncover the principles that determine how leverage works so you can put it to use in your wealth plan.

  This chapter covers the first (and most difficult) of the nine principles of leverage that you need to understand before you can overcome the constraints that limit your life. Stick with me through this first foundational principle and the rest of the leverage principles will be easier to digest.

  PRINCIPLE 1: MATHEMATICAL EXPECTANCY

  Mathematical expectancy is how you convert an unknowable and uncertain future into statistical confidence. It’s how you convert doubt into a predictable outcome.

  When you understand how mathematical expectancy works, it will change how you play the wealth building game forever.

  It’s All About Expectancy

  Expectancy and the closely related strategies of risk management and leverage are the three most important factors determining your financial success.

  That’s because all wealth is math, and there are two equations that govern how your wealth grows. The mathematical expectancy equation determines your compound growth rate, and the future value equation determines what it will grow to, and by what date. When you combine these two equations, you have a complete framework for understanding your wealth growth process.

  Unfortunately, most people have only a vague understanding of how expectancy works or what it means. Most people are turned off by math so the topic is rarely discussed in the press or in bestselling business books.

  But this is unfortunate. Readers are missing out because mathematical expectancy proves that wealth planning is a rational, duplicable science that can be reduced to equations and principles that are safe and smart to use. These equations define the scope and shape of the process by forming boun
daries around the knowledge required, which then provides a clear direction for best practices.

  More importantly, mathematical expectancy is particularly interesting because it converts the uncertainty of an unknowable future into a plannable process that is clear and scientific, and that has predictable outcomes.

  How Expectancy and Probability Interact in the Real World

  Expectancy goes by many names, including expectation, mathematical expectation, EV, average, mean value, mean, or first moment.

  What it tells you is how much you can expect to make, on average, per dollar risked. That definition clearly connects expectancy to your wealth growth, so let’s look at the formula:

  While that’s pretty straightforward, let’s make it even simpler and more intuitive by reducing it to just two variables: probability times payoff. It’s the probability of something occurring multiplied by the payoff when it occurs.

  In other words, you already understand probability, which is the odds of something occurring. Everybody gets that. A fair coin has 50% odds of heads coming up on any flip. Expectancy simply adds one more dimension by multiplying the probability of something occurring times the payoff you get when it occurs.

  For example, what happens if heads pays $5 and tails loses $2? And how does expectancy change when heads pays $7, but tails loses $8? Those questions are answered by expectancy, not probability. So what you should notice is how probability is the odds of something occurring, but expectancy tells you the financial impact those occurrences have, and that’s where leverage comes into play.

  The key thing to notice is how the payoff dimension completely changes the math. It converts the already intuitive odds of something occurring into something different – something that eludes most people because you’re not trained to think in terms of two dimensions with a payoff variable.

  Expectancy is the result of how much you make when you’re right, minus how much you lose when you’re wrong, multiplied by how frequently you’re right or wrong. That net number is the average amount you expect to make each time you put your capital at risk, which determines your return on investment in your future value equation.