Leverage: being and becoming a bionic man.

What’s the most powerful force in the world? As Einstein noted: compound interest.i Compound interest can be our best friend or our worst enemy, depending on whether we’ve access to the Fed’s discount lending window, or we’re paying off seventeen different 19.99% p.a. interest rate credit cards with one another, or where we are in between those two extremes, which itself is predicated on our understanding of a very specific phenomenon, id est leverage.

Leverage in business and investing can obviously be used to do things like fractional reserve banking and Starlink-powered remote working, but when we’re talking about more colourful, dare I say interesting, things like cars, watches, fine art, vacation properties, or other expensive hobbies, leverage can be used to enjoy more of what we want without so much sacrificed opportunity cost of such unproductive assets. Y’see leverage is a very broad and powerful concept. And sticking with the fun stuff, some “collectors” will not only borrow to make their purchases but also borrow against their illiquid assets, sometimes more scrupulously,ii sometimes less,iii sometimes for “better” reasons, sometimes less, but the amount of financial gymnastics available to the truly well-heeled is fairly staggering these days. Indeed, our financialised feudalistic future is very much predicated on the ability of a few elites to leverage the living bejeesus out of their assets creativityAnd the darker and more mysterious the asset class, the more creativity flourishes.iv

As a fairly savvy entrepreneur and investor myself,v I get it. Leverage is fun if not downright essential to keeping the momentum going. Entrepreneurs and investorsvi like yours truly are all too keen to multiply the snowball until it’s an avalanche in our back pockets,vii taking off only the smallest baby-snowballs with which to amuse ourselves and allowing the mother-snowball to keep growing all the while. Why mess with a good thing?

But not everyone gets this or sees this, sometimes for cultural reasons surrounding what’s considered “appropriate” topics of conversation, and sometimes for reasons of poor parenting, and no doubt genetics and luck play roles, but all of which was brought to the fore after Sparky joined the collection last month and several of my less financially savvy acquaintances kept asking me “HOW??!” No doubt that their unconscious envy was forcing them to grapple with my latest affront to their pre-constructed realities as to their own self-importance and self-worth, but without a reasonable knowledge of leverage and its wizard-like powers, I almost certainly looked to them like a magical alien dragon of pure energy or what was it. That, and my day job “front” was working very much as intended.viii But leverage is an invisible force, indeed one of the great wonders of the world. As with USAF Colonel Steve Austin – the $6mn man – you can’t see from afar how much technology enhances our individual abilities.

In addition to Steve’s timeless understanding of humankind’s ability to leverage technology,ix this also brings us neatly to MP’s “What interests me in a project” from 2014, a piece that I didn’t understand terribly well when I first read it six years ago but is coming into clearer focus in my 35th year on this planet. To quote one particularly relevant section to our discussion today :

Leverage means that if I spend an hour of my life mixing flour and water with yeast, and working dough and putting things in ovens, I’ve thus made one loaf of bread. But should I instead use an hour of my life looking into the production process of a bread factory, which makes half a million loaves of bread over its lifetime, and I manage to reduce losses in such a way that net production increases by 0.1%, I’ve made 500 breads. Also in one hour.

There you go, the difference between using your work hour to make one or five hundred loaves of bread is exactly the leverage you have access to. Time is, by and large, fungible, so that one hour is the same as four quarters just like four quarters are mostly the same as a whole hour. As such, it’s always imperative to employ the greatest available leverage.

If you’re to make a loaf of bread, the various methods to make it are not the same. If you employ the first method, you work for an hour. If you employ the second method, you work seven seconds and change, and for the rest you make love or pick your fleas or whatever else you may wish to do.

Finance as leverage. Computers as leverage. Technologyx as leverage. For entrepreneurs and investors, to say nothing of collectors, these are a few of our favourite things! These Einsteinian wonders, these bionic powers…
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  1. Einstein’s full quote was allegedly:

    Compound interest is the 8th wonder of the world. He who understands it, earns it; he who doesn’t, pays it.

    But you get the gist.

  2. A person with a collection of top postwar and contemporary art may be able to borrow up to 50% of its value. If the paintings are in any way risky—say, the work of only one or two artists—the loan-to-value ratios offered will fall. An art loan with a top private bank costs 1.5 to 3 percentage points more than the benchmark London interbank offered rate, so isn’t an especially cheap form of debt.

    via WSJ, July 2020. Though I dunno what the fuck Carol Ryan is smoking because 1.5% more than 0% is pretty fucking cheap money if you ask me. But hey, everything is relative.

  3. Take Inigo Philbrick for example:

    According to allegations unsealed today in Manhattan federal court, from approximately 2016 through 2019, Philbrick engaged in a scheme to defraud multiple individuals and entities in the art market as a means to finance his art business; he is accused of making material misrepresentations and omissions to art collectors, investors, and lenders to access valuable works of art and obtain sales proceeds, funding, and loans; and he knowingly misrepresented the ownership of certain artworks by selling a total of more than 100 percent of the share in an artwork to multiple individuals, according to court records.

    via Artnet News. And you thought the mortgage-backed securities market circa 2006 was dark and dodgy. That’s nothing on the fine art market.

  4. Some might call these enlightened corners of the sociopolitical worlds “corrupt” but only because they weren’t invited to the party and so are just a bit salty about this fact.
  5. I’m still no Chamath, but exceedingly few are! But like Chamath, I’ve learned all too well in my nearly 25 years as an investor and entrepreneur that “niches get riches” (which sounds better in an American accent but you get the point).
  6. Entrepreneurs and investors are really the artists of our economic age, albeit ones increasingly limited to the world of intangibles. By contrast, the great contemporary fine artists of our age, like Damien Hirst, Jeff Koons, and Virgil Abloh, seamlessly blur the lines between physical material and socioeconomic material as their artistic media. Is it any wonder the two camps get along so famously?
  7. Avalanche, domino, etc.

  8. Paper bags go in and out of the bakery all day every day, who’s to say what’s inside them?
  9. To any and all ends, to be sure.
  10. Technology can be textiles – allowing us to purchase beautiful machine-knit garments by Versace or Vuitton that would’ve cost 100x as much were the threads spun by hand as in the 17th century – but it can also be in cars, where a DCT-equipped supercar complements and enhances our abilities, flattering our inputs, nurturing our development, and taking us to heights otherwise unattainable in more “engaging” machinery. Do we really want to live in the past, especially the recent past? Fuck nostalgia. Give us the future or give us death!

    But what do you suppose the original leveraged tech was? Fire? The stick? No matter because there never has been and never could be a human society that didn’t have leveraged tech and wasn’t stressed in some way by it. I guess this puts me somewhat in the “technological determinist” camp, which isn’t to say that I dismiss social technologies, far from it, but if the tech is the chicken and the social tech is the egg, I’m an “egg first” kind of guy.

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