Steve Jobs: "I think one of the things that really separates us from the high primates is that we're tool builders” via maudit on youtube.
Humans are inefficient.
Well, according to a study that measured the efficiency of locomotion for various species on the planet. The Condor was the World's most efficient animal, using the least amount of energy to cover a kilometre. Humans were unimpressive, an 'also-ran' in the field. However, when measuring a man on a bicycle against the condor, the man blew the condor away. When Steve Jobs saw this study, he saw the computer as the bicycle, a tool to increase the mind's efficiency. A tool of leverage.
“Give me a place to stand and with a lever I will move the whole world.”
Archimedes (287 - 212 BC)
Leverage is "the exertion of force by means of a lever to create movement" and is one of those principles that once you understand it, you see it everywhere. There's plenty of levers around us creating some kind of movement.
Naval has described (at least) four kinds of leverage: Labour, Capital, Code, Media.
With Labour, the lever is people working for you. Obvious in areas of manual labour. 10 people building house will be faster than one. As long as the profits are greater than interest payable, borrowed cash is the lever for Capital.
Code and Media have leverage in that they need only be created once, whether if be a website (Code) or a Podcast or Book (Media). Once created, they can be used, listened, watched repeatedly. The important aspect here is that there is no marginal cost of replication.
Leverage can be more subtle. Subtle, yet powerful.
Network effects are leverage in action. A useful network, is one that leverages the number of users in it. Reputational or brand leverage is yet another form. Warren Buffett has a brand as one of the best investors ever. This gives him a form of leverage. Any company that gets purchased by Berkshire Hatherway gets a seal of approval. He may be able to even demand a lower purchase price.
This touches on another principle: the halo effect. This effect, sometimes called the halo error, is the tendency for positive impressions of people, products, businesses or brands in one area to positively influence our opinion in other areas. Apple is a good example. Once you use one Apple product we find ourselves, as if on autopilot, favouring other Apple products over competitors even if they offer better service, better price. Competitors are just different, why change? We love what we know.
There is, however, some small print. While leverage is useful and beneficial when it is working in your favour, it can be harmful, even ruinous, if it goes against you. Vividly, we often see articles of investors using leverage to gain profits but in overreaching, they are wiped out in spectacular and tragic fashion. As Warren Buffett says "When you combine ignorance and leverage, you get some pretty interesting results." By interesting, I read disastrous.
The key, then, in life is putting leverage to good use in our lives but being acutely aware of the risks of it going against us. We must be willing to give up extra profits to avoid an asymmetric risk of being wiped out completely.