It took me a few weeks to really understand what this word meant. I knew the definition of it in terms of accounting but I never knew this word was that powerful until recently. Robert Kiyosaki no doubt has done me one of the biggest favours I could ever ask for. The fact that I am lucky to be able to connect with his books also gave me the word I am about to talk about today. He mentioned it is the biggest distinction between the rich and poor. Everyone of you know this word but it has brought greater meaning to me in the last few weeks. The word is LEVERAGE. Originating from the word lever, which allows you to gain an 'advantage'. Scientifically we use the lever concept to help us do something by using less resources. In accounting/finance terms, leverage is associated with borrowings which allows us to pay for something using less of our own money. And in other context, leverage is something you gain advantage from and gives bargaining power. Robert gave the simplest definition to understand, "doing more with less".
First of all, the concept of leverage I will discuss about today is not about persuading you to borrow money or taking a margin loan. And I promise you I am not about to introduce you some leveraged product to invest in. What I am focusing on is more of why you need leverage and the importance of it. Let me give you the simplest examples to understand the concept of leverage I am trying to talk about. Two people work eight hours a day, but one earns more than the other. Why? One of them has more leverage. Another example, two students study for 20 hours prior to the exam. One does better than the other. Why? Leverage. In investing, two people buy the same shares at the same time at the same price, one makes a higher profit/loss. Why? Leverage. I hope you haven't got sick of the word yet. In short, people can gain leverage in the easiest known ways, doing more and working harder than the others. All of us have 24 hours in a day, the people who are at the top spend those 24 hours better than anyone else. Now you know why your boss works less hours than you but gets maybe a few times your pay, your boss has leverage!!
I hope you have gained a different dimension to word by now. So what does this mean for you? What can you do? As always I am just trying to open up people's minds just a bit more so they can benefit from it. I would be happy if anyone could actually understand what I've written. It make complete sense to me but it may not to the next person.
This is partially an investing topic, but before I proceed, I would like give you the answer to this question. What is a person's biggest leverage ? Well, there's no doubt about this answer, it is your mind/brain. Your brain can do wonders if you really explore and it is truly your biggest leverage. I am not talking about being smart or stupid, it is the way you position yourself and your nature of approach. I've always believed that with the right attitude and approach, there's really so much a person can do. I am not going to discuss what type of attitudes are right or wrong, but just keep in mind every time when you're doing something, make sure you give yourself the opportunity to make it. Your mind is practically the thing that makes EVERYTHING work, it has to start from there. Any hint of success comes from that very first thought in the mind.
Gaining Leverage
There are many ways to gain leverage, it may come from obtaining a new skill, new knowledge or anything that can enhance your return on something. For example,if you are a builder, if you are able to build both commercial and residential buildings, then you got leverage as most other builders may only do one. In terms of knowledge, some people take two degrees or further on postgrad studies for the same reason. Gaining leverage in terms of being more employable.Financially, there are hundreds of ways to make more money. You can start an online business, do a part-time job, work on weekends or you can make some investments in various instruments. Referring to my to my last post, I mentioned about generating other forms of income. Considering the working environment and the commitments people have today, it is really hard to do a second job or work on a part-time business. For example in a developing country like in Malaysia, working till late night and on weekends are common sights. At the end of the month, if you receive a good pay cheque, it compensates, but what if that pay cheque is insufficient and you simply do not have time anything else?
One of the important characteristics about investing is it gives you leverage. You AND your money are working at the same time! And that is doing more with less. The part whereby I feel investing is very attractive is because it doesn't take you much time and it is extremely convenient. With the internet and a phone, it is more than enough to do some investments.
Stages of Investing
At the beginning, we know very little or almost nothing about making investments. One of the best source of information is the business section of the newspapers. That will tell you a lot about economic news and corporate happenings. Even if you find it hard to understand at least read some of it. And when you come across similar news or terms, there's when you start to take more notice and understand. The internet has also ample of financial news available.
At the same time, I would recommend some personal finance or investing books which will tell two very important things. One will tell you why to invest and how to go about it. The investing books will tell you a lot about history and trends. I believe history is one of the most important part of an investor's guide. This is simply because number one, history tends to repeat itself. And number two, making sure you don't make the exact same mistakes that have been made before. For people who don't take note on history, they will make unnecessary errors and would waste some time making corrections. If you take note of history right from after the Great Depression at least, you would have seen a lot of trends through numerous economic and market cycles. And that will probably save you from making the most common errors. It's sort of a fast track.
The starting I would say is the most tedious part, learning everything from zero and having the difficulty of trying to understand something very different. And as I said many times, once you cross that starting part, your opportunities are endless. You could choose to "specialise" in certain classes of investments or you could try and do a few at the same time. Once you built your foundations, this is the time where you can see the benefits of investing in terms of your time.
The maintenance stage, is the time whereby you spend about 15 minutes catching up on news and movements everyday. That's just about how much time you need a day. And maybe once a month, spending about a few hours evaluating your portfolio and probably learning from a new book.
Will I Lose Money?
In investing, losing money is similar to making mistakes. To be brutally honest, making mistakes is the best education you will ever receive. Yes, you may read as much as you can about things to avoid doing, but the truth is you can never avoid making mistakes . But the biggest consolation is that it will be the one step along the way to succeeding. Donald Trump lost a lot of his fortune before recovering and making it even bigger. Robert Kiyosaki failed a FEW times before actually succeeding in his business. And even the great Warren Buffett made some silly errors along the way like selling too early or buying on spiraling prices (ConocoPhillips). Making mistakes and building from it is an evident success story for all.
Something You Should Know
I learnt this recently I do agree with the writer. There's a misconception in people when their share prices fall they haven't incurred a loss until they SELL it. For people who believe this statement I advise you remove this misconception immediately. Here's why.
You have $1000 and you bought 1000 shares for $1. If the share price falls to $0.90, the value of your investment is $900. Have you made a loss? YES! The fact is whether you keep the stock or sell it for cash, your net worth is $900. If the share prices returns to $1 tomorrow, it's another case because that has hasn't happened. But what has already happened when your share price fell is that you've already made a loss. Please don't live in denial. So next time DO NOT be FOOLED about not making a loss by not selling.
So what does it mean? My biggest gift for you today. Only hold stocks that you think will give you the best return from this point of time. Let's say the price of your share fell, ONLY IF you feel when it recovers it will outperform the others should you KEEP it. If you feel you've made mistake, sell it and buy something better that could give you a better return from this point of time. Remember!! The moment your share price fell WAS the time you made a loss NOT the time you sold it.
Leverage is the ability to do more with less
~deyao~
